Question

Consider the situation that the economy is not at its equilibrium output level. How would the...

Consider the situation that the economy is not at its equilibrium output level. How would the real GDP move without the intervention of monetary and fiscal policy?
       A.The long-run aggregate supply curve would shift until a new potential GDP is reached.
       B.It would go back to the original GDP level by moving along the short-run aggregate supply curve or aggregate demand curve.
       C.Short-run aggregate supply curve would shift automatically until it reaches the original equilibrium.
       D.Aggregate demand curve would shift automatically until it reaches the original equilibrium.

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Answer #1

Option C

The automatic process in which the aggregate market adjusts from short-run equilibrium to long-run equilibrium. Self-correction results through shifts of the short-run aggregate supply curve caused by changes in wages (and other resource prices). The self-correction mechanism acts to close both recessionary gaps and inflationary gaps. The short-run aggregate supply curve increases (shifts rightward) due to lower wages to close a recessionary gap and decreases (shifts leftward) due to higher wages to close an inflationary gap.

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