Question

Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium?
Choose one answer.
a. The increase in the price level to Pbreduces real GDP demanded, shifting the aggregate demand curve back to AD1, returning the economy to its potential output at A.
b. Firms produce more in anticipation of future higher prices, thus shifting the SRAS curve upward until the gap is eliminated at D.
c. Firms and workers will negotiate higher nominal wages to restore lost purchasing power. This shifts the SRAS curve to the left until the gap is eliminated at D.
d. The increase in the price level to Pbdecreases consumption which in turn leads firms to cut production shifting the SRAS curve to the left until the gap is eliminated at D.

Answer 1

Answer:

C. Firms and workers will negotiate higher nominal wages to restore lost purchasing power. This shifts the SRAS curve to the left until the gap is eliminated at D.