-Refer to the above figure. Unexpected expansionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run
A) real GDP will be Y1, and the price level will be P1.
B) real GDP will be Y2, and the price level will be P2.
C) real GDP will be Y1, and the price level will be above P2.
D) real GDP will be between Y1 and Y2, and the price level will be between P1 and P2.

Question

-Refer to the above figure. Unexpected expansionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run
A) real GDP will be Y1, and the price level will be P1. 
B) real GDP will be Y2, and the price level will be P2. 
C) real GDP will be Y1, and the price level will be above P2. 
D) real GDP will be between Y1 and Y2, and the price level will be between P1 and P2.

Quizplus · Accepted Answer

In the long run, the economy tends to return to its potential output level, which is Y1 in this case. However, the increase in aggregate demand that shifts the AD curve to AD2 results in a higher price level. Thus, while real GDP returns to Y1, the price level ends up being above P2 due to the inflationary pressures caused by the expansionary monetary policy.

-Refer to the Above Figure