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24 Mar 2018

If an economy is in short-run equilibrium that is below potential, what forces will bring the economy to long-run equilibrium?

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Jamar Ferry
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26 Mar 2018

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Related questions

Which one of the following is not true when the economy is in macroeconomic​ equilibrium?

A. When the economy is at long-run equilibrium, total unemployment+structural unemployment.
B. When the economy is at long-run equilibrium, SRAS=AD=LRAS.
C. When the economy is at long-run equilibrium, firms will have excess capacity.
D. When the economy is at long-run equilibrium, actual GDP=potential GDP.

Which one of the following is not true when the economy is in macroeconomic equilibrium?

a. When the economy is at long-run equilibrium, firms will have excess capacity.

b. When the economy is at long-run equilibrium, SRAS=AD=LRAS.

c. When the economy is at long-run equilibrium, total unemployment = frictional unemployment + structural unemployment.

d. When the economy is at long-run equilibrium, actual GDP=potential GDP.

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.

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