When the economy is in a boom, the intersection between the:
A) short run AS and the AD occurs at an output level lower than potential output.
B) long run AS and the AD occurs at an output level higher than potential output.
C) short run AS and the AD occurs at an output level higher than potential output.
D) long run AS and the AD occurs at an output level lower than potential output.

Question

Quizplus · Accepted Answer

During a boom, demand for goods and services increases, causing an increase in aggregate demand (AD). This leads to an increase in both prices and output in the short run, as firms increase production to meet the higher demand. However, in the long run, this increase in demand will lead to an increase in the prices of inputs, such as labor and materials, causing an increase in the cost of production. This, in turn, will cause the short run aggregate supply (AS) curve to shift upward and to the left. As a result, the intersection between the short run AS and AD will occur at an output level higher than potential output.

When the Economy Is in a Boom, the Intersection Between