Figure 33-5

Refer to Figure 33-5. Suppose the economy starts at Point Y. If there is a reduction in aggregate demand, then in the long run the economy moves to

Question

Figure 33-5

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Refer to Figure 33-5. Suppose the economy starts at Point Y. If there is a reduction in aggregate demand, then in the long run the economy moves to

BlackTom AI · Accepted Answer

First, examine what a reduction in aggregate demand (AD) does to the short-run equilibrium. A leftward shift in AD lowers both the price level and the real output in the short run, moving the economy away from Y along the SRAS.

Option X: This would require a movement along the SRAS to a higher price level or different output in the short run; however, after a reduction in AD, the long-run adjustment works through wage and price adjustments that restore output to potential, not to a higher short-run point like X.

Option Z: In the long run, output returns to the economy’s potential level, which is determined by the LRAS curve. The price level falls as wages and prices adjust downward, but output returns to the same vertical LRAS position. On the diagram, Point Z lies where the economy ends up after these adjustments, reflecting the restored potential output with a lower price level. This is consistent with the idea that long-run output is determined by resources and technology, not by the short-run demand shock.

Option W: This point would imply either a mismatched combination of output and price relative to LRAS or a persistence of the initial shock in a way that does not reflect full long-run adjustment, making it inconsistent with standard AD–AS long-run restoration to potential output.

Option V: This point typically represents a position on the short-run adjustment path that does not align with the economy returning to its potential output in the long run; it would imply a different interaction of price level and output than the standard long-run outcome after an AD contraction.

In summary, the long-run consequence of a reduction in aggregate demand is a return to potential output (the LRAS level) with a lower price level, which corresponds to Point Z on the diagram.

Figure 33-5 Refer to Figure 33-5. Suppose the economy starts at Point Y. If there is a reduction in aggregate demand, then in the long run the economy moves to

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Figure 33-5 ​ Refer to Figure 33-5. Suppose the economy starts at Point Y. If there is a reduction in aggregate demand, then in the long run the economy moves to