DSE 20-36

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

Suppose the economy initially operates at E₀ and the total import value equals to the total export value. If the government decreases the amount of social security assistance for the elderly, in the short run, the deflationary (output) gap will become __________ and there will be a __________.

A. narrower ….. trade surplus

B. narrower ….. trade deficit

C. wider ….. trade surplus

D. wider ….. trade deficit