Figure 26-11
-Refer to Figure 26-11.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,and the Federal Reserve pursues no policy,then at point B
A)there is pressure on wages and prices to rise.
B)the unemployment rate is very,very low.
C)firms are operating above their normal capacity.
D)the economy is below full employment.
E)incomes and profits are rising.

Question

Figure 26-11 
-Refer to Figure 26-11.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,and the Federal Reserve pursues no policy,then at point B
A)there is pressure on wages and prices to rise. 
B)the unemployment rate is very,very low. 
C)firms are operating above their normal capacity. 
D)the economy is below full employment. 
E)incomes and profits are rising.

Quizplus · Accepted Answer

At point B, the economy is operating at its potential output or full employment level of output, and the intersection of AD and SRAS curves is at the long-run equilibrium level. As the economy moves from point A to point B, there is a shift in AD, causing an increase in output and a decrease in unemployment, but in the long run, the SRAS curve also shifts up due to expectations of higher wages and prices, leading to higher inflation and returning the economy to its full employment level of output. Therefore, there is no pressure on wages and prices to rise, the unemployment rate is not very, very low, firms are not operating above their normal capacity, and incomes and profits may or may not be rising depending on the nature of the shift in AD.

Figure 26-11 -Refer to Figure 26-11.In the Dynamic Model of AD-AS in of AD-AS