Consider an economy starting from a position of full employment.Which one of the following changes does not occur as a result of an increase in aggregate demand?
A)An inflationary gap arises.
B)The long- run aggregate supply curve shifts rightward to create the new long- run equilibrium.
C)The price level rises.
D)Real GDP increases in the short run.
E)Factor prices rise in the long run, shifting the short- run aggregate supply curve to the left.

Question

Quizplus · Accepted Answer

An increase in aggregate demand will result in higher inflation, real GDP, and price level in the short run. However, in the long run, the economy will adjust and the long-run aggregate supply curve will shift to the right, leading to a new long-run equilibrium at a higher level of real GDP but the original price level. Therefore, there will not be a shift in the long-run aggregate supply curve as a result of an increase in aggregate demand.

Consider an Economy Starting from a Position of Full Employment