Exhibit 10-3
-Consider Exhibit 10-3.In this situation,long-run equilibrium would be established by a(n)

Question

Exhibit 10-3 
-Consider Exhibit 10-3.In this situation,long-run equilibrium would be established by a(n)

Quizplus · Accepted Answer

In the current situation, there is an expansionary gap, which means that output is higher than the potential GDP. This can be seen from the intersection of the short-run aggregate supply curve and the aggregate demand curve lying to the right of the potential GDP. In the long run, this gap needs to be closed to establish equilibrium. This means that the short-run aggregate supply needs to decrease, shifting to the left, until it intersects the aggregate demand curve at the potential GDP level. Therefore, the correct choice is B, as it suggests a decrease in short-run aggregate supply to close the expansionary gap.

Exhibit 10-3 -Consider Exhibit 10-3.In This Situation,long-Run Equilibrium Would Be Established by Be