The short-run (SR) equilibrium is the intersection between AD and SRAS, and long

Question

The short-run (SR) equilibrium is the intersection between AD and SRAS, and long-run (LR) equilibrium is the intersection between AD and LRAS. Every LR equilibrium is a SR equilibrium, but a SR equilibrium is not always the LR equilibrium. If an economy is operating at a SR equilibrium where Y > Yf, which of the following will occur in the process toward the new LR equilibrium when the economy corrects itself?




A. Price increases.

B. Real GDP decreases.

C. Unemployment rate falls.

D. Only A and B.

E. Only B and C.

Explanation / Answer

A is incorrect. The market can move from Y to Yf through a fall in AD, which will lower prices. B is correct. If Y > Yf, then Y must fall to equal Yf. C. is incorrect. The unemployment rate should increase as Y falls toward Yf.

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