In the mid-to-late 1990s,changes in the health care industry,substantially reduced health care costs relative to other goods and services.Which of the following is an appropriate description of the mechanism behind this supply shock?
A)The AS curve likely shifted to the right which likely explains the short-run fall in unemployment.
B)The ensuing increase in productive capacity led to the rightward shift of the LRAS which is a likely explanation for the protracted decline in the unemployment rate of the 1990s.
C)A positive output gap would have resulted in the short-run but it was eventually closed by a rightward shift of the LRAS which is a likely explanation for the protracted decline in the inflation rate of the 1990s.
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

A reduction in health care costs can be seen as a positive supply shock, which would shift the Aggregate Supply (AS) curve to the right. This shift can explain a short-run fall in unemployment as firms are able to produce more at a lower cost (A). Over time, this increase in productive capacity can lead to a rightward shift of the Long-Run Aggregate Supply (LRAS), contributing to a sustained decline in unemployment (B). Additionally, a positive output gap resulting from the initial shock could be closed by the economy's adjustment to a new equilibrium, reflected in the rightward shift of the LRAS, which could explain a prolonged decline in inflation rates (C). Therefore, all the given mechanisms (A, B, C) are plausible explanations for the observed economic outcomes, making D the correct choice.

In the Mid-To-Late 1990s,changes in the Health Care Industry,substantially Reduced