LRAS AS AS2 E1 E2 T1 3 Es AD AD2gt; Y Y2 VP 1. The economy in the above diagram has suffered a negative demand shock and will return to a long-run…

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LRASASAS2E1E2T1 3EsADAD2> YY2 VP1. The economy in the above diagram has suffered a negative demand shock and willreturn to a long-run equilibrium through the self-correcting mechanism. As theeconomy moves form E2 to E3, output increases because:A. the real interest rate falls along the MP curve, raising the demand for goods andservices along the IS curve.B. the MP curve is shifted down, lowering the real interest rate.C.the demand for goods and services increases and the IS curve returns to its originalposition.D. the MP curve is shifted up, raising the real interest rate and encouraging investment.

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