Refer to the above figure. At the initial long-run equilibrium, the price level is ________, and the price level will be ________.
A) 20; 45
B) 20; 40
C) 40; 45
D) 20; 20

Question

Quizplus · Accepted Answer

At the initial long-run equilibrium, the price level is 20, which is the intersection point of AD and SRAS. In the long run, the AD curve shifts to the right due to an increase in the money supply, which causes an increase in aggregate demand. As a result, the price level increases to P2, which is the intersection point of the new AD curve and the LRAS curve. However, in the long run, wages and input prices also adjust to the increase in the price level, causing the SRAS curve to shift to the left. This process continues until the economy reaches a new long-run equilibrium at the intersection point of AD and the new SRAS, which is the original price level of 20. Therefore, the price level will still be 20 in the long run.

Refer to the Above Figure