Assume that initially economy is in the long-run equilibrium. For each of the following scenarios, say what will happen in the long run.
1. Because of a negative demand shock output in the short run is below original potential output. In the long run
A.) Equilibrium is achieved at a higher level of potential output.
B.) AD shifts to the left and brings economy back to original potential output.
C.) SRAS shifts to the left and brings economy back to original potential output.
D.) AD shifts to the right and brings economy back to original potential output.
E.) Equilibrium is achieved at a lower level of potential output.
F.) SRAS shifts to the right and brings economy back to original potential output. .
2. Because of a negative temporary supply shock current output is below original potential output. In the long run
A.) SRAS shifts to the right and brings economy back to original potential output.
B.) New long-run equilibrium is achieved at a higher level of potential output.
C.) AD shifts to the left and brings economy back to original potential output.
D.) AD shifts to the right and brings economy back to original potential output.
E.) New long-run equilibrium is achieved at a lower level of potential output.
F.) SRAS shifts to the left and brings economy back to original potential output. .
3. Because of a positive demand shock current output is above original potential output. In the long run
A.) AD shifts to the left and brings economy back to original potential output.
B.) New long-run equilibrium is achieved at a higher level of potential output.
C.) AD shifts to the right and brings economy back to original potential output.
D.) New long-run equilibrium is achieved at a lower level of potential output.
E.) SRAS shifts to the left and brings economy back to original potential output.
F.) New long-run equilibrium is achieved at a lower level of potential output.
4. Because of a positive temporary supply shock current output is above original potential output. In the long run
A.) SRAS shifts to the right and brings economy back to original potential output.
B.) AD shifts to the left and brings economy back to original potential output.
C.) New long-run equilibrium is achieved at a lower level of potential output.
D.) AD shifts to the right and brings economy back to original potential output.
E.) SRAS shifts to the left and brings economy back to original potential output.
F.) New long-run equilibrium is achieved at a higher level of potential output. .
5. Because of a positive permanent supply shock current output is above original potential output. In the long run
A.) SRAS shifts to the right and brings economy back to original potential output.
B.) SRAS shifts to the left and brings economy back to original potential output.
C.) AD shifts to the right and brings economy back to original potential output.
D.) New long-run equilibrium is achieved at a lower level of potential output.
E.) New long-run equilibrium is achieved at a higher level of potential output.
F.) AD shifts to the left and brings economy back to original potential output. .
6. Because of a negative permanent supply shock current output is below original potential output. In the long run
A.) New long-run equilibrium is achieved at a lower level of potential output.
B.) SRAS shifts to the left and brings economy back to original potential output.
C.) SRAS shifts to the right and brings economy back to original potential output.
D.) AD shifts to the right and brings economy back to original potential output.
E.) AD shifts to the left and brings economy back to original potential output.
F.) New long-run equilibrium is achieved at a higher level of potential output.
Assume that initially economy is in the long-run equilibrium. For each of the following scenarios, say what will happen in the long run.
1. Because of a negative demand shock output in the short run is below original potential output. In the long run
A.) Equilibrium is achieved at a higher level of potential output.
B.) AD shifts to the left and brings economy back to original potential output.
C.) SRAS shifts to the left and brings economy back to original potential output.
D.) AD shifts to the right and brings economy back to original potential output.
E.) Equilibrium is achieved at a lower level of potential output.
F.) SRAS shifts to the right and brings economy back to original potential output. .
2. Because of a negative temporary supply shock current output is below original potential output. In the long run
A.) SRAS shifts to the right and brings economy back to original potential output.
B.) New long-run equilibrium is achieved at a higher level of potential output.
C.) AD shifts to the left and brings economy back to original potential output.
D.) AD shifts to the right and brings economy back to original potential output.
E.) New long-run equilibrium is achieved at a lower level of potential output.
F.) SRAS shifts to the left and brings economy back to original potential output. .
3. Because of a positive demand shock current output is above original potential output. In the long run
A.) AD shifts to the left and brings economy back to original potential output.
B.) New long-run equilibrium is achieved at a higher level of potential output.
C.) AD shifts to the right and brings economy back to original potential output.
D.) New long-run equilibrium is achieved at a lower level of potential output.
E.) SRAS shifts to the left and brings economy back to original potential output.
F.) New long-run equilibrium is achieved at a lower level of potential output.
4. Because of a positive temporary supply shock current output is above original potential output. In the long run
A.) SRAS shifts to the right and brings economy back to original potential output.
B.) AD shifts to the left and brings economy back to original potential output.
C.) New long-run equilibrium is achieved at a lower level of potential output.
D.) AD shifts to the right and brings economy back to original potential output.
E.) SRAS shifts to the left and brings economy back to original potential output.
F.) New long-run equilibrium is achieved at a higher level of potential output. .
5. Because of a positive permanent supply shock current output is above original potential output. In the long run
A.) SRAS shifts to the right and brings economy back to original potential output.
B.) SRAS shifts to the left and brings economy back to original potential output.
C.) AD shifts to the right and brings economy back to original potential output.
D.) New long-run equilibrium is achieved at a lower level of potential output.
E.) New long-run equilibrium is achieved at a higher level of potential output.
F.) AD shifts to the left and brings economy back to original potential output. .
6. Because of a negative permanent supply shock current output is below original potential output. In the long run
A.) New long-run equilibrium is achieved at a lower level of potential output.
B.) SRAS shifts to the left and brings economy back to original potential output.
C.) SRAS shifts to the right and brings economy back to original potential output.
D.) AD shifts to the right and brings economy back to original potential output.
E.) AD shifts to the left and brings economy back to original potential output.
F.) New long-run equilibrium is achieved at a higher level of potential output.
