Question

Emily is an economist whose views are closest to the self-correcting viewpoint. She observes that the economy has slipped into a recession and thinks that this is due to a leftward shift in the demand curve. Emily believes that the proper response to a leftward shift in aggregate demand is for the government to do nothing. How does she think the economy will respond in the long run?

a) AD will shift back to the right.
b) There will be no additional shifts to AD or AS.
c) LRAS will shift left.
d) AS will shift right.

Answer 1

Economist Emily, who believes in the self-correcting nature of the economy, would expect the AS curve to shift right in the long run, self-adjusting the economy back to potential GDP after a leftward shift in AD.

Step-by-step explanation:

Emily, as an economist holding the self-correcting viewpoint, would assert that the appropriate response to a leftward shift in aggregate demand (AD) is for the government to remain passive. She believes that in the long run, the natural mechanisms of the economy will adjust to restore the economy to its full potential GDP. This adjustment likely means that, without government intervention, the aggregate supply (AS) curve would shift to the right, as resources, wages, and prices adjust over time, leading back to potential output. Hence, the correct answer to how Emily thinks the economy will respond in the long run to a leftward shift in aggregate demand is (d) AS will shift right.