Suppose the Economy Is Initially in Long-Run Equilibrium

question 9

Multiple Choice

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

• A) Output rises; prices are unchanged from the initial value.
• B) Output and the price level are unchanged from their initial values.
• C) Output falls; prices are unchanged from the initial value.
• D) Prices fall; output is unchanged from its initial value.
• E) Prices rise; output is unchanged from its initial value.

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Definitions:

User Cost

The cost associated with the use of a service or the depletion of a capital good.

Fishery

An area with a naturally occurring population of aquatic species which can be harvested for economic purposes.

Marine Animal

An animal that inhabits the ocean or other marine environments.

User Cost

The economic cost of using a resource today, which considers the lost opportunity of using it in the future.