Suppose that a shock causes the aggregate demand curve to shift rightward. If the Fed does nothing
A) the economy will experience a temporary reduction in employment but will eventually return to full employment.
B) output initially will exceed potential GDP, but the economy will return to potential GDP with a higher price level.
C) the short-run aggregate supply curve will not shift leftward and there will be continued inflation.
D) eventually the short-run aggregate supply curve will shift leftward and there will be continued inflation.

Question

Quizplus · Accepted Answer

When the aggregate demand curve shifts rightward, it initially causes an increase in both the output and the price level. This situation leads to an economy operating above its potential GDP. Over time, as prices adjust, the economy moves back towards its potential GDP, but with a higher price level than before the shock. This adjustment process does not imply a leftward shift in the short-run aggregate supply curve, but rather a movement along it due to increased demand, followed by an adjustment in prices and output back to potential levels.

Suppose That a Shock Causes the Aggregate Demand Curve to Shift