Suppose the economy is currently in long- run equilibrium with real GDP equal to potential GDP. A positive demand shock, that is not validated by the Bank of Canada, will eventually result in

Question

Quizplus · Accepted Answer

A positive demand shock will increase aggregate demand, causing an increase in both real GDP and the price level. However, since the Bank of Canada has not validated the shock, they will not adjust monetary policy to accommodate the increased demand. This will eventually lead to a higher price level and real GDP at potential output due to the short-run adjustment process, which involves firms increasing output and prices in response to the increased demand.

Suppose the Economy Is Currently in Long- Run Equilibrium with Real