Figure 8-4
-The reason that it is possible for the economy in Figure 8-4 to be at E₂ rather than at E₁ is that
A)in the long run there is always less than full employment.
B)in the short run the economy can produce more than it can in a long-run full-adjustment situation.
C)AD always shifts outward and never shifts inward.
D)the economy must be in a recession.

Question

Figure 8-4 
-The reason that it is possible for the economy in Figure 8-4 to be at E₂ rather than at E₁ is that
A)in the long run there is always less than full employment. 
B)in the short run the economy can produce more than it can in a long-run full-adjustment situation. 
C)AD always shifts outward and never shifts inward. 
D)the economy must be in a recession.

Quizplus · Accepted Answer

In the short run, there may be factors that allow the economy to produce more than it would be able to in the long run due to full adjustment. For example, low interest rates or increased government spending can temporarily stimulate demand and lead to output above potential GDP. However, in the long run, the economy will adjust back to the natural rate of output, represented by E₁.

Figure 8-4 -The Reason That It Is Possible for the Economy in the Economy