Question

Suppose the economy is currently in equilibrium at output level Q2, but full-employment output is at level Q1. If the government fails to enact fiscal policy and no other conditions change, the eventual price level will most likely be closest to

Answer 1

Answer: P1

Explanation:

In the long-run and even without government intervention, the economy will eventually converge on its long run equilibrium level which is the full employment output level of Q1.

This means that eventually, the aggregate demand in this scenario will go down to AD1 or AS would change such that the long run price will go to P1 as this is the full employment output price level.