Suppose the economy is initially operating at point A in the above figure. Which of the following statements is TRUE?

Question

Quizplus · Accepted Answer

An unexpected reduction in aggregate demand will cause a short-run contractionary gap, meaning that the economy will move from point A to point B in the short run. In the long run, prices and wages will adjust, and the economy will return to potential output at point C. Therefore, option A is incorrect, and option C is incorrect as point C is already the long-run equilibrium point. Option D is also incorrect.

Suppose the Economy Is Initially Operating at Point a in the Above