Refers to Exhibit 4. Suppose the economy is operating in a recession such as point B in Exhibit 4. If policy makers allow the economy to adjust to the long run natural rate on its own, ?
Correct answer: A. People will reduce their price expectations and the short run aggregate supply will shift right
- A. People will reduce their price expectations and the short run aggregate supply will shift right
- B. People will raise their price expectations and aggregate demand will shift left
- C. People will raise their price expectations and the short run aggregate supply will shift left
- D. People will reduce their price expectations and aggregate demand will shift right
Explanation
In a recession, actual output is below its natural level, so wages and price expectations gradually fall. Lower expected prices shift short-run aggregate supply rightward until output returns to its natural rate.
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About Macroeconomics
The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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