Question

Refer to Figure 24-4. Following the positive AS shock shown in the diagram, the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________.

A) 90; 750
B) 60; 1000
C) 110; 1000
D) 60; 1300
E) 90; 1200

Answer 1

After a positive AS shock, the economy adjusts to a new equilibrium with a lower price level relative to pre-shock conditions and a real GDP that aligns with the potential GDP level.

Step-by-step explanation:

Following a positive aggregate supply (AS) shock in the diagram, which shifts the AS curve to the right, resulting in a lower equilibrium price level and higher output, the adjustment process will move the economy to a new long-run equilibrium. This equilibrium is reached when the adjustments in wages and resource prices have fully taken place, resulting in the aggregate supply (AS) curve shifting back to align with the potential output of the economy represented by the long-run aggregate supply (LRAS) curve. Although the specific figures related to the question are not provided in the reference text, typically, the long-run equilibrium would have the price level lower than before the AS shock and the real GDP returning to the potential GDP level, the level of output where the economy can sustainably operate.