If an economy was initially in long-run equilibrium,an unanticipated increase in aggregate demand will tend to cause
A)an increase in unemployment.
B)a decrease in the price of resources.
C)a reduction in real output that will spiral downward into a prolonged recession.
D)a temporarily high level of output and employment that cannot be maintained.

Question

Quizplus · Accepted Answer

An unanticipated increase in aggregate demand, in the short run, will lead to a temporarily high level of output and employment as firms increase production to meet the higher demand. However, since the economy was initially in long-run equilibrium, there will be upward pressure on wages and prices as firms compete for limited resources. These higher costs will eventually lead to a decrease in short-run aggregate supply, causing output and employment to return to their original levels in the long run. Therefore, a temporarily high level of output and employment cannot be maintained in the long run.

If an Economy Was Initially in Long-Run Equilibrium,an Unanticipated Increase