Assume the economy is currently in a long-run equilibrium with real GDP equal to Y^*.A positive AD shock (with no change in the money supply)will eventually result in

Question

Quizplus · Accepted Answer

A positive AD shock will shift the AD curve to the right, causing an increase in both the price level and real GDP in the short run. However, as the economy moves toward a new long-run equilibrium point, prices will continue to rise until they reach the level where the SRAS curve intersects the LRAS curve at the new potential level of GDP (YS2). At this point, real GDP will be at its potential level (since the LRAS curve is vertical at potential GDP) and the price level will be higher than before the AD shock. Therefore, the correct answer is (D) a higher price level and GDP at its potential level.

Assume the Economy Is Currently in a Long-Run Equilibrium with Real