In the view of real-business-cycle theory, an increase in the long-run aggregate supply would lead to a(n)
A) increase in aggregate demand by an equal amount, so real output would increase and the price level would be unchanged.
B) increase in aggregate demand by an equal amount, so real output and the price level would increase.
C) decrease in aggregate demand, so real output would increase and the price level would decrease.
D) decrease in aggregate demand, so real output and the price level would increase.

Question

Quizplus · Accepted Answer

According to real-business-cycle theory, an increase in long-run aggregate supply is driven by an increase in productivity or efficiency, which leads to a decrease in production costs. This decrease in costs causes firms to supply more output at each price level. As a result, there is an increase in aggregate supply, but not in aggregate demand. Therefore, the equilibrium point moves along the short-run aggregate supply curve to a new point where real output increases, but the price level stays the same. This is illustrated by a rightward shift in the long-run aggregate supply curve.

In the View of Real-Business-Cycle Theory, an Increase in the Long-Run