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 rate of output

Question

Quizplus · Accepted Answer

An increase in aggregate demand will cause an increase in both output and prices in the short run as firms respond to the increased demand by producing more output at higher prices. However, in the long run, the increase in output will be limited by the economy's potential output, also known as the natural rate of output, while the increase in prices will be sustained due to inflationary pressures. Therefore, in the long run, only prices will increase.

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