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Economic activity that is above potential output ________
Economic activity that is above potential output ________.
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A. signals that potential output is about to increase.
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B. is not possible.
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C. results from an economic shock to which the economy has yet to adjust fully
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D. occurs near the trough, rather than the peak, of a business cycle
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E. none of the above
According to the "self-correcting mechanism" in the AD-AS framework, ________.
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A. the aggregate demand curve shifts up or down as needed to bring the economy to full employment
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B. the inflation rate changes as needed to move the economy along the short-run aggregate supply curve until output is at potential output
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C. the long-run aggregate supply curve shifts until it intersects both the aggregate demand and short-run aggregate supply curves at a single point
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D. inflation and expected inflation are unaffected by deviations of output from potential output
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E. none of the above
Expert Solution
C. results from an economic shock to which the economy has yet to adjust fully
Economic activity above potential output in short run can occur due to either a positive demand shock or a positive supply shock . In both these cases , real GDP rises and an output gap is creater , actual GDP > potential GDP . It occurs in short run and in long run economy slowly adjusts and the equilibrium is restored . Such positive shocks mainly occur during business cycle peaks .
E. none of the above
The short run aggregate supply curve shifts up or down as needed to bring the economy to full employment and potential output .
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