The economy is in long-run equilibrium when there is an incorrectly anticipated increase in aggregate demand brought about by expansionary monetary policy.Specifically,aggregate demand increases by more than people anticipate (bias downward).According to new classical theory,the price level will __________ and Real GDP will __________ in the short run.In the long run,the price level will be __________ than it was before aggregate demand increased.

Question

Quizplus · Accepted Answer

In the short run, an unanticipated increase in aggregate demand due to expansionary monetary policy will cause both the price level and Real GDP to rise. In the long run, the price level will be higher than it was before the increase in aggregate demand, but Real GDP will return to its long-run potential level.

The Economy Is in Long-Run Equilibrium When There Is an Incorrectly