suppose the economy is initially in long - run equilibrium. then suppose there is a reduction in investment…

suppose the economy is initially in long - run equilibrium. then suppose there is a reduction in investment spending. according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?\n a. prices rise and output is unchanged from its initial value.\n b. prices fall and output is unchanged from its initial value.\n c. output rises and prices are unchanged from the initial value.\n d. output falls and prices are unchanged from the initial value.\n e. output and the price level are unchanged from their initial values.

suppose the economy is initially in long - run equilibrium. then suppose there is a reduction in investment spending. according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?\n a. prices rise and output is unchanged from its initial value.\n b. prices fall and output is unchanged from its initial value.\n c. output rises and prices are unchanged from the initial value.\n d. output falls and prices are unchanged from the initial value.\n e. output and the price level are unchanged from their initial values.

Answer

Brief Explanations:

In the long - run aggregate supply and demand model, the long - run aggregate supply curve is vertical at the natural rate of output. A reduction in investment spending shifts the aggregate demand curve to the left. In the long run, wages and prices are flexible. As a result, the short - run aggregate supply curve shifts to the right until the economy returns to the natural rate of output. This results in a lower price level and output returning to its initial (natural rate) value.

Answer:

B. Prices fall and output is unchanged from its initial value.