When the economy experiences a permanent positive supply side shock that shifts the long-run aggregate supply to the right, the short run aggregate supply curve: Question 2Select one:A.Will begin by shifting left, and then be pulled right by the long-run aggregate supply over time.B.None of these adjustments will occur.C.Will gradually shift right until it reaches long-run aggregate supply and the new long-run equilibrium.D.Will instantly shift right with the long-run aggregate supply to the new long-run equilibrium.
Question
When the economy experiences a permanent positive supply side shock that shifts the long-run aggregate supply to the right, the short run aggregate supply curve: Question 2Select one:A.Will begin by shifting left, and then be pulled right by the long-run aggregate supply over time.B.None of these adjustments will occur.C.Will gradually shift right until it reaches long-run aggregate supply and the new long-run equilibrium.D.Will instantly shift right with the long-run aggregate supply to the new long-run equilibrium.
Solution
The correct answer is C. The short-run aggregate supply (SRAS) curve will gradually shift to the right until it reaches the long-run aggregate supply (LRAS) and the new long-run equilibrium.
Here's why:
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A positive supply side shock means that the economy can produce more goods and services at every price level. This could be due to factors like technological advancements, increase in resources, etc.
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This causes the LRAS curve to shift to the right, indicating an increase in the potential output of the economy.
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In the short run, prices and wages are sticky, meaning they do not adjust immediately to changes in the economy. Therefore, the SRAS curve does not instantly shift right with the LRAS curve.
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Over time, as prices and wages adjust to the
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