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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