Suppose the economy begins in a long-run equilibrium with Y = Y*.A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a ________ shift of ________.
A)rightward; the aggregate supply curve
B)rightward; the aggregate demand curve
C)leftward; the aggregate supply curve
D)leftward; the aggregate demand curve
E)rightward; Y*

Question

Quizplus · Accepted Answer

A permanent increase in aggregate demand will initially cause an increase in real GDP and price level. However, in the long run, wages and prices will adjust, and the economy will move towards the natural level of output, Y*. Therefore, the short-run increase in real GDP will be reversed as the aggregate supply curve shifts leftward to return the economy to long-run equilibrium at Y*.

Suppose the Economy Begins in a Long-Run Equilibrium with Y