Suppose the Economy Is in a Long-Run Equilibrium

question 23

Multiple Choice

Suppose the economy is in a long-run equilibrium.The AS curve now shifts upward due to a one-time increase in the price of raw materials.If the central bank validates this supply shock,

• A)the inflationary gap that has been created will be exacerbated.
• B)an inflationary gap will be created,which will cause the AS curve to shift upward again.
• C)the aggregate demand curve will shift up and result in a higher price level.
• D)a recessionary gap will be created,which eventually causes the AS curve to shift downward.
• E)a recessionary gap will be created and will cause a permanent reduction of employment.

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Definitions:

Aggregate Demand

The aggregate requirement for products and services in an economy at a specific general price point during a certain time frame.

Money Demand Curve

A graphical representation showing the relationship between the interest rate and the quantity of money that people want to hold.

Interest Rates

The cost of borrowing money or the return on investment for savings, typically expressed as a percentage of the principal.

Money Supply

The entirety of cash, coins, and account balances in checking and savings, representing the monetary assets accessible in an economy at a given time.