Figure 33-8.
-Refer to Figure 33-8. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P3 and Y3 , then it must be the case that
A) short run aggregate supply has decreased.
B) short run aggregate supply has increased.
C) aggregate demand has increased.
D) aggregate demand has decreased.

Question

Figure 33-8. 
-Refer to Figure 33-8. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P3 and Y3 , then it must be the case that
A) short run aggregate supply has decreased. 
B) short run aggregate supply has increased. 
C) aggregate demand has increased. 
D) aggregate demand has decreased.

Quizplus · Accepted Answer

If the economy moves from point Z to point P3 and Y3, it means that the output has increased while the price level has also increased, indicating an increase in aggregate demand. However, if short run aggregate supply had also increased, the increase in output would have caused a decrease in the price level, and we would have ended up at a point with a Y3 and a lower P level. Therefore, the only possibility is that short run aggregate supply has decreased, causing an increase in prices and leading to the new equilibrium point at P3 and Y3.

Figure 33-8. -Refer to Figure 33-8. Suppose the Economy Starts at Z