Question

In the long​ run, persistent deflation in a growing economy can occur if

A. increases in AD are proportionately larger than the increase in LRAS.
B. there is a temporary decrease in input prices.
C. AD increases regardless of what the LRAS does.
D. increases in the LRAS are proportionately larger than the increases in AD.

Answer 1

The correct answer is option D.

Step-by-step explanation:

Deflation refers to the process of decline in the general price level of an economy. Deflation causes the purchasing power of money and real income to increase.

It causes the price of goods, services, labor, and capital to decline. Borrowers are harmed because of deflation.

When the long-run aggregate supply increases proportionately more than the increase in the aggregate demand, the LRAS will shift to the right proportionately more than a rightward shift in the AD.

This will cause the equilibrium price level to decrease and equilibrium quantity to increase.