Within the AD/AS Model, How Does an Economy Adjust to an Output

question 177

Multiple Choice

Within the AD/AS model, how does an economy adjust to an output beyond its long-run capacity as a result of an unanticipated increase in aggregate demand?

• A) Wage rates and resource prices will fall, causing a decrease in aggregate demand and the restoration of equilibrium at a higher price level.
• B) Long-run aggregate supply will increase, leading to a new equilibrium at a lower price level.
• C) Resource prices and real interest rates will rise causing output to fall back to its long-run sustainable rate.
• D) Lower real interest rates will stimulate demand and restore equilibrium at the initial price level.

---

Definitions:

Net Change

The difference in an entity's value between two points in time, commonly used in reference to stock prices or financial performance.

Utility

The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).

Behavioral Economics

A field of economics that studies how psychological, cognitive, emotional, cultural, and social factors affect economic decisions of individuals and institutions.

Limited Knowledge

The state of having restricted information or understanding about a subject or situation, emphasizing incomplete or finite expertise.