Assuming that 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 real GDP and the price level. However, in the long-run, the economy will adjust and reach a new long-run equilibrium at potential output (YS1) and a higher price level (P1). Therefore, the correct answer is A. B and D are incorrect because they suggest a decrease in GDP at its potential level, which is not consistent with the long-run equilibrium. C is incorrect because ongoing inflation is not guaranteed, as the economy may adjust to the shock in the long-run. E is incorrect because a positive AD shock will result in a higher price level in the long-run.

Assuming That the Economy Is Currently in a Long- Run