AP Macroeconomics Question 424: Answer and Explanation

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Question: 424

11.

The figure above shows aggregate demand (AD) and supply (AS) for the economy. Assuming that aggregate demand remains constant, which of the following best predicts the short-run price level, the long-run price level, and the long-run level of output?

SHORT-RUN PRICE LEVEL     LONG-RUN PRICE LEVEL     LONG-RUN OUTPUT

  • A. P2     P1     Q4
  • B. P2     P2     Q1
  • C. P2     P3     Q1
  • D. P1     P2     Q3
  • E. P3     P2     Q2

Correct Answer: C

Explanation:

C-Short-run equilibrium is where short-run AS intersects AD, in this case, above full employment. In the long run, wages increase, shifting SRAS leftward until settling at full employment Q1 and higher price P3.