Within the AD/AS model, an unanticipated increase in short-run aggregate supply will cause real output to
A) increase and the general level of prices to fall.
B) decrease and the general level of prices to rise.
C) increase and the general level of prices to rise.
D) decrease and the general level of prices to fall.

Question

Quizplus · Accepted Answer

An unanticipated increase in short-run aggregate supply means that firms are producing more output than expected at current prices. This leads to a temporary surplus of goods in the market, causing prices to fall in the short run. As a result, real output increases along with a fall in prices. This shift is represented by a movement from point A to point B along the AD curve. Note that this is different from a supply shock or a long-term increase in aggregate supply which can have different effects on output and prices.

Within the AD/AS Model, an Unanticipated Increase in Short-Run Aggregate