The Figure Given Below Depicts the Long Run Equilibrium in an Economy

question 68

Multiple Choice

The figure given below depicts the long run equilibrium in an economy. Figure 14.1 In the figure:
AD₁ and AD₂: Aggregate demand curves
AS₁ and AS₂: Aggregate supply curves
Refer to Figure 14.1.When the economy moves from point B to point C:

• A)both the unemployment rate and the rate of inflation increases.
• B)both the unemployment rate and the rate of inflation declines.
• C)the unemployment rate declines at the cost of higher inflation.
• D)the rate of inflation declines at the cost of a higher unemployment rate.
• E)the rate of inflation declines with no change in the unemployment rate.

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Definitions:

Long-run Average Total Cost

The average total cost when all factors of production are variable and economies of scale are fully exploited, indicating the lowest possible cost per unit.

Economies of Scale

Economies of scale refer to the cost advantage that arises with an increased output of a product, as fixed costs are spread out over more units of production, leading to a decrease in the per-unit cost.

Diseconomies of Scale

The phenomenon where production costs increase as a firm's production scale becomes too large, leading to inefficiencies.

Diseconomies of Scale

The phenomenon where production costs increase as a company grows larger, leading to reduced efficiency.