Figure 16-3
-Refer to the Figure 16-3.Starting from c and 3,where does a decrease in aggregate demand move the economy to,in the short run and the long run?
A) a and 1 in the short run,b and 2 in the long run
B) b and 2 in the short run,a and 1 in the long run
C) d and 4 in the short run,e and 5 in the long run
D) b and 4 in the short run,e and 1 in the long run

Question

Figure 16-3 
-Refer to the Figure 16-3.Starting from c and 3,where does a decrease in aggregate demand move the economy to,in the short run and the long run?
A) a and 1 in the short run,b and 2 in the long run 
B) b and 2 in the short run,a and 1 in the long run 
C) d and 4 in the short run,e and 5 in the long run 
D) b and 4 in the short run,e and 1 in the long run

Quizplus · Accepted Answer

Starting from c and 3, a decrease in aggregate demand will shift the AD curve to the left. In the short run, this will lead to a movement to point b and a decrease in both output (Y) and price level (P), as shown by the movement from c to b along the SRAS curve. In the long run, prices and wages are flexible, and therefore, the SRAS curve will shift to the left to meet the new equilibrium at a lower output level (Y'), and a lower price level (P'). This will lead to a movement to point a, where output is lower than before the decrease in aggregate demand, but the price level has returned to its original level. Therefore, the correct answer is option B (b and 2 in the short run, a and 1 in the long run).

Figure 16-3 -Refer to the Figure 16-3.Starting from C and 3,where Does