Refer to the above diagram.If the price level rises above P₁ because of an increase in aggregate demand, the: A)economy will move up along curve B and output will temporarily increase. B)long-run aggregate supply curve C will shift upward. C)short-run aggregate supply curve B will automatically shift to the right. D)economy's output first will decline, then increase, and finally return to Q₁.

Question

Quizplus · Accepted Answer

When the price level rises above P₁ due to an increase in aggregate demand, the economy will move up along curve B, which represents the short-run aggregate supply. This is because firms will increase production in response to the higher prices, leading to a temporary increase in output. The long-run aggregate supply (curve C) represents the level of potential output in the economy, and it is not affected by changes in the price level or aggregate demand. Therefore, option B is incorrect. Option C is also incorrect because the short-run aggregate supply curve B will not automatically shift to the right when the price level rises. It is important to note that shifts in the short-run aggregate supply curve are caused by factors such as changes in production costs or technology. Option D is incorrect as well because there is no indication that the economy's output will initially decline before increasing and returning to its original level. The temporary increase in output due to the increase in aggregate demand will eventually lead to a new equilibrium point on curve B.

Refer to the Above Diagram