Suppose the current level of real GDP for an economy is below its potential level of...

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Suppose the current level of real GDP for an economy is below its potential level of...

Suppose the current level of real GDP for an economy is below its potential level of RGDP. Starting with this situation, and in the absence of any government action, what should next happen in the AD-AS model?

Group of answer choices

A. A decrease in the Long-Run Aggregate Supply

B. An increase in Aggregate Demand

C. A decrease in Aggregate Demand

D. An increase in the Short-Run Aggregate Supply

E. An increase in the Long-Run Aggregate Supply

F. A decrease in the Short-Run Aggregate Supply

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Answer 1

Answer #1

When the economy is operating at the level where Real GDP is below the potential level of real GDP then we can say that there is a recession in economy. As we know potential level of equilibrium is the full employment level.

So, If the economy is below potential level in long run then there is a lack of aggregate demand.

Now, Since long run aggregate supply does not change immediately so to attain the potential level of Real GDP we have increase the aggregate demand so that the output gap is removed.

So, The Aggregate Demand should increase.

So, Option B. is correct

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Answer 2

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