Beginning at a long- run equilibrium, an increase in aggregate demand
A)increases the price level and in the long run increases real GDP.
B)increases the price level, but in the long run there is no change in real GDP.
C)increases the price level and in the long run decreases real GDP.
D)decreases the price level and in the long run increases real GDP.
E)decreases the price level and in the long run decreases real GDP.

Question

Quizplus · Accepted Answer

In the short run, an increase in aggregate demand causes an increase in both the price level and real GDP due to firms increasing production to meet increased demand. However, in the long run, firms adjust their production levels and input prices adjust to reflect changes in the price level, resulting in no change in real GDP but a continued increase in the price level.

Beginning at a Long- Run Equilibrium, an Increase in Aggregate