If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand increases, we expect the AE function to shift to a
A)higher level but then return to its original position as the price level rises.
B)lower level, but then return to its original position as the price level rises.
C)lower level and stay there.
D)higher level and stay there.
E)higher level, but then shift part of the way down to its original position as the price level rises.

Question

Quizplus · Accepted Answer

With a vertical AS curve, the economy is at full capacity, so an increase in aggregate demand will initially shift the AE function to a higher level. However, as the price level rises, real output doesn't change, and the AE function returns to its original position.

If the Economy Is in Macroeconomic Equilibrium with a Vertical