Assuming the economy starts at long-run equilibrium, if a drought severely damages the wheat harvest, what will happen to the price level and output in the long run if policymakers let the economy self-correct according to the aggregate demand and aggregate supply framework?

Show Answers

Production increases while prices remain the same as initially.Both output and the price level remain at their original long-run values.Output declines but prices stay constant compared to the initial level.Prices decrease while output stays at its initial level.Output rises and prices fall from their starting points.

Explanation

In the long run, the economy adjusts back to its natural level of output despite temporary shocks like a drought. Although the drought initially disrupts production, prices and output eventually return to their original levels as the aggregate supply curve shifts, assuming no policy intervention.