Starting from long-run equilibrium,what impact will an increase in aggregate demand have?
A)It will cause an inflationary gap.
B)It will shift the LRAS to the right.
C)It will increase unemployment.
D)It will result in a lower price level.

Question

Quizplus · Accepted Answer

An increase in aggregate demand from long-run equilibrium will cause an inflationary gap, where aggregate output exceeds potential output, resulting in a higher price level. The increase in demand will cause firms to increase productions, leading to an increase in prices due to excess demand. Therefore, option A is the best choice. Option B is incorrect since the long-run aggregate supply (LRAS) curve is independent of changes in aggregate demand. Option C is also incorrect since an increase in aggregate demand would lead to an increase in employment as firms expand production to meet demand. Option D is also incorrect since prices increase due to excess demand.

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