Suppose the government increases aggregate demand to a level that increases GDP above its long-run equilibrium level.What sequence of events would follow?

Question

Quizplus · Accepted Answer

When the government increases aggregate demand, prices begin to rise due to the excess demand, which increases GDP initially. The increase in GDP increases the demand for workers, and they demand higher wages. This increase in wages leads to higher production costs, which shifts the short-run aggregate supply to the left. As a result, GDP drops back to its long-run equilibrium level. Therefore, Option A correctly describes the sequence of events that follow when the government increases aggregate demand.

Suppose the Government Increases Aggregate Demand to a Level That