-In the above figure, assume the economy starts out in equilibrium at point d. If the Fed increases the money supply so that the new aggregate demand curve is AD₃, then the long-run equilibrium will be at point

Question

Quizplus · Accepted Answer

The long-run equilibrium will be at point a because the increase in the money supply will lead to an increase in aggregate demand, which will shift the aggregate demand curve to the right. This will cause the price level to rise and the quantity of output to increase. In the long run, the economy will return to its original equilibrium at point a, but with a higher price level and a higher quantity of output.

-In the Above Figure, Assume the Economy Starts Out in Equilibrium