A demand shock that increases real GDP above its full-employment level will,in the long run,

Question

Quizplus · Accepted Answer

The initial demand shock will cause an increase in both real GDP and the price level in the short run. However, in the long run, firms will adjust their prices and wages to match the higher level of output. This will lead to an increase in the wage rate as firms compete for workers, which will cause an upward shift of the aggregate supply curve. As a result, the economy will return to its full-employment level, with a higher price level and a higher level of output than before the demand shock.

A Demand Shock That Increases Real GDP Above Its Full-Employment