Assume that the economy is initially at long-run equilibrium and short-run aggre

Question

Assume that the economy is initially at long-run equilibrium and short-run aggregate supply shifts left (due to a negative supply shock). As a result of the negative supply shock, in the long run, the price level and output are higher than in the original long-run equilibrium. and output are lower than in the original long-run equilibrium is lower and output is the same as the original long-run equilibrium. is the same and output is lower than in the original long-run equilibrium. None of the above answers is correct

Explanation / Answer

A) The correct answer to this question is "None of the above". In the long run, due to negative supply shock, the price of the goods in the economy will be higher and the output will be same as the original equilibrium (and not increased like price)

B) "The price level is lowe and GDP remain unchanged in the long run" Tweets will force the price down and after facing recession for some time economy will settle at a lower price and unchanged potential output.

C) "Both the price level and the real output will fall in initial equilibrium". Due to tweets, the economy will face lower demand and price and output both will fall.

D) "Aggregate demand shift left" fall in demand will shift the demand curve to the left at a lower price and lower output.

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