The economy is initially in long-run equilibrium.Expectations are adaptive,prices and wages are flexible,and there is an unanticipated increase in aggregate demand.In the short run,the price level will be __________ than it was in long-run equilibrium and Real GDP will be __________ than it was in long-run equilibrium.

Question

Quizplus · Accepted Answer

In the short run, an unanticipated increase in aggregate demand leads to higher prices due to the flexible nature of prices and wages, and higher Real GDP as the economy adjusts to the increased demand before returning to long-run equilibrium.

The Economy Is Initially in Long-Run Equilibrium