What will happen in the long run if there is an unexpected increase in aggregate demand and the Fed does nothing?
A)Both output and prices will be higher.
B)Only the price level will increase; real output will return to its natural level.
C)A recession will occur and the aggregate demand curve will shift back to its starting position.
D)The aggregate supply curve will shift rightward; this will return price to its initial level and further increase real output.

Question

Quizplus · Accepted Answer

If there is an unexpected increase in aggregate demand and the Fed does nothing, only the price level will increase in the short run as firms try to meet the increased demand. However, real output will eventually return to its natural level as wages and resource prices adjust to the higher prices. This is shown by a movement along the short-run aggregate supply curve. The long-run aggregate supply curve will shift to the right, allowing for an increase in real output at the original price level. Therefore, the best choice is B.

What Will Happen in the Long Run If There Is