Suppose the economy is initially in long run equilibrium Then suppose there is a drought that destroys much of the wheat crop if policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model to aggregate demand and aggregate supply what happens to prices and output in the long run ?
Correct answer: B. Output and the price level are unchanged from their initial values
- A. Output rises; prices are unchanged from the initial value
- B. Output and the price level are unchanged from their initial values
- C. Output falls; prices are unchanged from the initial value
- D. Prices fall; output is unchanged from its initial value
Explanation
The drought initially shifts short-run aggregate supply left, but in the long run the economy returns to its natural output. With aggregate demand unchanged, the price level also returns to its initial value.
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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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