Question

Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________.

A) leftward; AD
B) rightward; AS
C) leftward; Y*
D) leftward; AS
E) rightward; AD

Answer 1

A positive AS shock on real GDP will be reversed in the long run with a leftward shift in AD.

Step-by-step explanation:

In the AD/AS model, a positive AS shock on real GDP will be reversed in the long run with a leftward shift in AD.

When there is a positive AS shock, real GDP increases in the short run. However, in the long run, the economy returns to potential output (full employment) and the only impact is on the price level. The AD curve shifts leftward because consumers feel pessimistic about the future, reducing consumer spending.

The correct answer is option A) leftward; AD.