Understand the role of flexible prices in bringing an economy back to potential GDP from an inflationary gap or recessionary gap
Question
Suppose the economy is initially in the long-run equilibrium, but a drop in consumer confidence causes the AD curve to shift
to the left. What will be the impact on prices and output in the short run and long run?
Select the correct answer below:
In the short run, and long run, both prices and output will fall.
In the short run, prices will fall, but output will stay the same. In the long run, both prices and output fall.
In the short run, both prices and output fall.
In the long run, prices fall, but output stays the same.
In the short run, and long run, prices fall, but output stays the same.