Question

Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those changes were caused by only one curve shifting, then those changes are best explained as the result of:

a. the AD curve shifting right.

b. the AS curve shifting right.

c. the AD curve shifting left.

d. the AS curve shifting left.

Short answer

The correct option is (c): the AD curve shifting left.

Step-by-step solution

The explanation for correct option (c)

In the AD-AS model, the long-run equilibrium is obtained when the short-run aggregate supply curve, aggregate demand curve, and long-run aggregate supply curves intersect.A shift in the aggregate demand curve causes price and GDP levels to change in the same direction. A short-run aggregate supply curve shift causes price and GDP levels to change in the opposite direction.

So, if an economy begins from long-run equilibrium, then the decline in price and output levels can be caused by a leftward shift of the aggregate demand curve.

Hence, the correct option is (c).

The explanation for correct options (a), (b), and (d) 

If the aggregate demand curve shifts rightward, there will be a rise in price and output levels.

So, option (a) is incorrect.

If the aggregate supply curve shifts rightward, there will be a rise in output level and a decline in the price level. So, option (b) is incorrect.

If the aggregate supply curve shifts leftward, there will be a fall in output and a price level rise. So, option (d) is incorrect.