Starting from long-run equilibrium,what will an increase in aggregate demand cause?
A)a recessionary gap in the short run
B)a recessionary gap in the short run and the long run
C)an inflationary gap in the short run and the long run
D)an inflationary gap in the short run

Question

Quizplus · Accepted Answer

An increase in aggregate demand from the long-run equilibrium will lead to a temporary increase in prices and output in the short run. However, in the long run, prices will adjust to the higher level of demand, and the economy will return to the long-run equilibrium level of output. As a result, an inflationary gap will occur in the short run due to the temporary increase in prices.

Starting from Long-Run Equilibrium,what Will an Increase in Aggregate Demand