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 curve with a movement along the long-run aggregate supply curve.
E) no change, since the economy is already in equilibrium.

Question

Quizplus · Accepted Answer

In the short-run, an increase in aggregate demand will cause prices and output to rise. This results in a movement upward along the short-run aggregate supply curve. However, in the long-run, prices and wages will adjust, causing the short-run aggregate supply curve to shift leftward towards the full-employment level of real GDP. Thus, in the long-run, the economy will return to the full-employment level of real GDP with a higher price level.

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