Figure 34-7
-Refer to Figure 34-7. Which of the following is correct?
A) A wave of optimism could move the economy from point a to point b.
B) If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the short run and long run.
C) It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2.
D) All of the above are correct.

Question

Figure 34-7 
-Refer to Figure 34-7. Which of the following is correct?
A) A wave of optimism could move the economy from point a to point b. 
B) If aggregate demand moves from AD1 to AD2, the economy will stay at point b in both the short run and long run. 
C) It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2. 
D) All of the above are correct.

Quizplus · Accepted Answer

The graph shows a short-run equilibrium at point a with aggregate demand AD1 and aggregate supply AS1, and a long-run equilibrium at point b with AD1 and AS2. The shift from AD1 to AD2 could be caused by either fiscal or monetary policy. Option A is incorrect because a wave of optimism would shift aggregate demand to the right, from AD1 to a new AD3, but it would not necessarily move the economy from point a to point b. Option B is incorrect because the long-run aggregate supply curve is vertical and determined by potential output, so any shift in aggregate demand will only cause a temporary movement along the curve, but eventually the economy will return to the natural rate of output at point b.

Figure 34-7 -Refer to Figure 34-7. Which of the Following Is Correct