Assume That Macroland Starts in a Long-Run Equilibrium and Then

question 176

Multiple Choice

Assume that Macroland starts in a long-run equilibrium and then faces a reduction in government spending. What chain of events will lead to a new long-run equilibrium?

• A) SRAS falls; then AD falls leading to a new long-run equilibrium with lower prices and lower output.
• B) AD falls causing unemployment. Unemployed workers eventually accept lower wages, increasing SRAS and leading to a new long-run equilibrium with lower prices and the original output.
• C) AD falls causing prices to fall. At lower prices, AD then rises back to the original level, leading to a return to the original price and output levels.
• D) SRAS falls causing unemployment. With less output, investments fall leading to a reduction in LRAS and a new long-run equilibrium with lower output and higher prices.

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Definitions:

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Contracts among a company's shareholders that describe their rights, obligations, and the company's operations.

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