The Long-Run Aggregate Supply Curve Is Vertical at $5 Billion

question 5

Multiple Choice

The long-run aggregate supply curve is vertical at $5 billion but the short-run aggregate supply curve intersects the aggregate demand curve at $6 billion.From this,we know that

• A)the economy is operating below full capacity in the short run,and will have to adjust by hiring more workers,thus reducing unemployment.
• B)the price level is too high.The only way long-run equilibrium can be restored is to lower the price level.
• C)adjustments will have to occur so that the long-run aggregate supply equals $6 billion.
• D)adjustments will have to occur so that the short-run aggregate supply intersects the aggregate demand curve at $5 billion.

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Definitions:

Crowds Out

Refers to the effect where increased government spending and borrowing reduce private investment in the markets.

Fiscal Policy

Governmental adjustments of its spending levels and tax rates to influence a nation's economy.

Financial Market

The marketplace where buyers and sellers interact to trade financial instruments, such as stocks, bonds, currencies, and derivatives, often within an institutional framework.

Crowding-Out

A situation where increased government spending leads to a reduction in private sector spending.