Starting from long-run equilibrium,an increase in aggregate demand increases ______ in the short run,but only increases ______ in the long run.
A) output; prices
B) prices; output
C) short-run aggregate supply; long-run aggregate supply
D) the money supply; the natural level of output

Question

Quizplus · Accepted Answer

An increase in aggregate demand would shift the AD curve to the right in the short run, leading to an increase in both output and prices. However, in the long run, wages and other input prices would also adjust, causing the short-run aggregate supply curve to shift leftward, leading to higher prices but returning output to its natural level. Therefore, in the long run, an increase in aggregate demand would only lead to higher prices, not output.

Starting from Long-Run Equilibrium,an Increase in Aggregate Demand Increases ______