-Refer to Figure 5.4. If the price level rises above P₁ because of an increase in aggregate demand, the: A) economy will move up along curve B and output will temporarily increase. B) the potential output line C will shift upward. C) aggregate supply curve B will automatically shift to the right. D) economy's output first will decline, then increase, and finally return to Y.

Question

Quizplus · Accepted Answer

When the price level rises due to an increase in aggregate demand, the economy moves up along the existing aggregate supply curve (in this case, curve B), leading to a temporary increase in output. This is because producers are willing to supply more at higher prices.