To determine the correct answer regarding the movement from point Z to a new equilibrium of P1 and Y1, we need to analyze the implications of such a movement on the economy, typically represented in an Aggregate Demand and Aggregate Supply (AD-AS) framework.
- If the price level increases (P0 to P1) while output (Y) also changes to Y1, it suggests that the economy is experiencing inflation, assuming some level of production is still achieved.
Given these observations, let's review the possible answers:
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a. Aggregate demand has increased.
- This could be a possible explanation if the increase in price level resulted from an increase in demand leading to higher output. However, if output has also decreased or just remained the same, while prices rose, it implies that demand might not have increased distinctly.
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b. Short run aggregate supply has increased.
- If short-run aggregate supply increased, we would typically expect to see a decrease in price levels or an increase in output but not both at the same time.
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c. Aggregate demand has decreased.
- This would lead to lower prices and output in the short run, contradicting the observed increase in price to P1.
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d. Short run aggregate supply has decreased.
- A decrease in short-run aggregate supply would lead to higher prices (as firms produce less at each price level) and potentially reduced output in the long run, which aligns with the movement from Z to P1 and Y1.
Based on the scenario described, the most plausible explanation for the movement from the original equilibrium to a new one with higher prices and potentially lower output would be:
d. Short run aggregate supply has decreased.
This reflects increased costs or negative shocks that shift the short-run aggregate supply curve to the left, causing higher prices and lower output in the new equilibrium (P1, Y1).
1 answer