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

If the price level rises above P₁ due to an increase in aggregate demand, there will be a temporary increase in output as the economy moves up along curve B. This is because prices have not yet adjusted to the increase in demand, allowing for higher output in the short-run. However, in the long-run, prices will adjust and the economy will return to its original equilibrium point at Q₁. There is no automatic shift in the short-run aggregate supply curve or the long-run aggregate supply curve in response to the price level increase.

Refer to the Above Diagram