The figure below shows short-run equilibrium in an aggregate demand-aggregate supply model.If the economy is currently producing Y₁ level of output,long-run equilibrium will be established if: Figure 10.5 A)the short-run aggregate supply curve shifts to the right to remove the expansionary gap. B)the short-run aggregate supply curve shifts to the left to remove the expansionary gap. C)the short-run aggregate supply curve shifts to the left to remove the recessionary gap. D)the short-run aggregate supply curve shifts to the right to remove the recessionary gap. E)there is a leftward shift of the aggregate demand curve.

Question

Quizplus · Accepted Answer

In the short-run equilibrium, the economy is producing at an output level greater than the potential output (YS). This implies that there is a recessionary gap. To establish long-run equilibrium, the economy needs to return to the potential output level. This can be achieved by shifting the short-run aggregate supply curve to the right, which would increase the production and decrease the price level until the economy reaches the potential output level. Therefore, the correct answer is D.

The Figure Below Shows Short-Run Equilibrium in an Aggregate Demand-Aggregate