Exhibit 11-3
-Consider Exhibit 11-3. In this situation, long-run equilibrium would be established by a(n)

Question

Exhibit 11-3 
-Consider Exhibit 11-3. In this situation, long-run equilibrium would be established by a(n)

Quizplus · Accepted Answer

The economy is experiencing an expansionary gap which means that the output level is above the long-run potential output. To reach a long-run equilibrium, the short-run aggregate supply needs to decrease to decrease the output level and match the potential output. Thus, option B is the correct choice. Option A is incorrect as an increase in short-run aggregate supply would further increase the output level. Option C and D are incorrect as they relate to a contractionary gap which is not present in this scenario. Option E is also incorrect as it would only shift the aggregate demand curve and not address the issue of the output level being above potential output.

Exhibit 11-3 -Consider Exhibit 11-3. in This Situation, Long-Run Equilibrium Would Be