Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregae supply, a one-period positive supply shock causes output to:
A) remain above the natural level for only one period.
B) remain above the natural level for more than one period.
C) remain below the natural level for only one period.
D) remain below the natural level for more than one period.
In the long run, the economy is at its full-employment level of output where the actual GDP is equal to potential GDP such that the aggregate supply curve is vertical.
Answer and Explanation:
In the long run, a one-period positive supply shock results in an increase in the aggregate supply curve and at the same time the aggregate demand curve shifts leftward which decreases the price level and output remains the same or full employment is achieved.
So, option (D) remain below the natural level for more than one period is correct.
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Economics 102: MacroeconomicsChapter 7 / Lesson 3