This graph represents aggregate demand and aggregate supply with the economy in long-run equilibrium. PRICE LEVEL LRAS SRAS AD OUTPUT 6. Which of the following statements best explains the mechanism by which the economy will eventually return to long-run equilibrium after the decrease in transfer payments? Assume no other changes in government spending and taxation programs. A. The reduction in the inflation rate due to the decrease in aggregate demand causes businesses to lower their expectations about the price level. This leads firms to produce more, shifting the short-run aggregate supply curve to the right, returning the economy to its natural rate of output. B. The reduction in the inflation rate due to the decrease in aggregate supply causes businesses to increase investment, shifting the aggregate demand curve to the right, returning the economy to its natural rate of output. C. The reduction in the inflation rate due to the increase in aggregate demand causes businesses to raise their expectations about future inflation. This leads firms to produce more, shifting the short-run aggregate supply curve to the right, returning the economy to its natural rate of output.

This graph represents aggregate demand and aggregate supply with the economy in long-run equilibrium. PRICE LEVEL LRAS SRAS AD OUTPUT 6. Which of the following statements best explains the mechanism by which the economy will eventually return to long-run equilibrium after the decrease in transfer payments? Assume no other changes in government spending and taxation programs. A. The reduction in the inflation rate due to the decrease in aggregate demand causes businesses to lower their expectations about the price level. This leads firms to produce more, shifting the short-run aggregate supply curve to the right, returning the economy to its natural rate of output. B. The reduction in the inflation rate due to the decrease in aggregate supply causes businesses to increase investment, shifting the aggregate demand curve to the right, returning the economy to its natural rate of output. C. The reduction in the inflation rate due to the increase in aggregate demand causes businesses to raise their expectations about future inflation. This leads firms to produce more, shifting the short-run aggregate supply curve to the right, returning the economy to its natural rate of output.

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter20: Monetary Policy

Section20.A: Policy Disputes Using The Self Correcting Aggregate Demand And Supply Model

Problem 3SQP

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