Suppose the economy is initially in long-run equilibrium. Then suppose there is an increase in military spending due to rising international tensions. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?
A) Output falls; prices are unchanged from the initial value.
B) Prices fall; output is unchanged from its initial value.
C) Output and the price level are unchanged from their initial values.
D) Prices rise; output is unchanged from its initial value.
E) Output rises; prices are unchanged from the initial value.

Question

Quizplus · Accepted Answer

In the long run, the economy returns to its potential output level, but the increase in aggregate demand from higher military spending leads to a higher price level.

Suppose the Economy Is Initially in Long-Run Equilibrium