Assume initially the economy is at full employment. If aggregate demand increases, the aggregate price level and costs will _____, and ultimately, the short run aggregate supply curve shifts to the _____.

Question

Quizplus · Accepted Answer

When aggregate demand increases, the aggregate price level and costs will rise, leading to inflationary pressures. In the short run, this may stimulate production and employment, but as costs continue to rise (due to higher demand for inputs), firms will eventually reduce output, causing the short-run aggregate supply (SRAS) curve to shift to the left, not the right. This adjustment reflects the economy's struggle to maintain output levels as input costs increase.

Assume Initially the Economy Is at Full Employment