Question

"According to AD-AD model, if policy makers do nothing for supply

shocks, the economy eventually returns to the natural level of
output as prices fall.
A.True
B.False"

Answer 1

The statement is False. According to the AD-AD model, if policymakers do nothing for supply shocks, the economy does not automatically return to the natural level of output.

Step-by-step explanation:

The statement is False. According to the AD-AD model, if policymakers do nothing for supply shocks, the economy does not automatically return to the natural level of output. Instead, prices continue to rise, leading to higher inflation. In the long run, the economy will experience a higher price level, but output will still be below the potential level.