Compared to the initial equilibrium,an initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in new long-run equilibrium with
A)a higher price level but the same real GDP.
B)a higher price level and an increased level of real GDP.
C)the same price level and a lower level of real GDP.
D)the same price level and the same real GDP.
E)None of the above answers is correct.

Question

Quizplus · Accepted Answer

An initial increase in aggregate demand without an increase in the quantity of money will cause a short-run increase in both price level and real GDP. However, in the long run, prices will adjust fully and reach a new equilibrium level, which will result in a higher price level but the same level of real GDP. This is due to the fact that in the long run, changes in aggregate demand only affect the price level, whereas changes in the money supply can affect both price level and real GDP. Since there is no change in the money supply in this scenario, the increase in aggregate demand only leads to a higher price level but does not have any effect on real GDP.

Compared to the Initial Equilibrium,an Initial Increase in Aggregate Demand