DSE 17-39

The diagram below shows the aggregate demand curve, the short run aggregate supply curve and the long run aggregate supply of an economy.

Suppose the economy initially operates at E₁ and the total import value equals total export value. If the government decreases the social security assistance to the elderly, in short run, the deflationary (output) gap will be __________ and there will be a __________.

A. narrower ….. trade surplus

B. wider ….. trade deficit

C. narrower ….. trade deficit

D. wider ….. trade surplus