Suppose the economy is initially in long-run equilibrium.After an increase in aggregate demand, which of the following describes the state of the economy in the long run?
A) Prices are higher, and output is higher.
B) Prices are lower, and output is lower.
C) Prices are higher, and output is the same.
D) Prices are the same, and output is lower.

Question

Suppose the economy is initially in long-run equilibrium.After an increase in aggregate demand, which of the following describes the state of the economy in the long run?  
A) Prices are higher, and output is higher. 
B) Prices are lower, and output is lower. 
C) Prices are higher, and output is the same. 
D) Prices are the same, and output is lower.

Quizplus · Accepted Answer

In the long run, an increase in aggregate demand leads to higher prices, but output returns to its natural level due to wage and price adjustments, leaving the output the same as before the demand increase.

Suppose the Economy Is Initially in Long-Run Equilibrium