Refer to the above graph.The economy is at point B₂, and aggregate demand increases.In the short run, the economy will: A)stay at point B₂. B)move to point C₂ and in the long run to B₃. C)move to point B₃ and in the long run to C₂. D)move to point B₁ and in the long run to B₁.

Question

Quizplus · Accepted Answer

In the short run, an increase in aggregate demand will cause an increase in real output (Y) and an increase in price level (P), moving the economy to point C. However, in the long run, the increase in aggregate demand will cause an increase in resource costs and production costs, which shifts the short-run aggregate supply curve to the left. As a result, the economy will move from point C to point B13, where the long-run aggregate supply curve intersects the new aggregate demand curve. This will result in a higher price level but the same level of real output as before.

Refer to the Above Graph