Beginning from a position of long-run equilibrium at the full-employment level of real GDP, the economy's short-run response to an increase in the aggregate demand curve would be:
A) a movement upward along the short-run aggregate supply curve.
B) a movement upward along the long-run aggregate supply curve.
C) a downward shift in the short-run aggregate supply curve.
D) a shift in both the aggregate demand curve and the short-run aggregate supply c urve with a movement along the long-run aggregate supply curve.

Question

Quizplus · Accepted Answer

In the short-run, an increase in aggregate demand would cause a movement upward along the short-run aggregate supply curve, as firms increase production and prices in response to increased demand. This would lead to an increase in real GDP and a temporary rise in the price level, until the economy eventually returns to its long-run equilibrium at the full-employment level of real GDP. Therefore, choices B and C can be eliminated. Choice D is also incorrect as a shift in both the aggregate demand curve and the short-run aggregate supply curve would lead to an ambiguous change in the price level and output, especially without knowing the direction of the shifts.

Beginning from a Position of Long-Run Equilibrium at the Full-Employment