Refer to the above diagram.If the price level rises above P₁ because of an increase in aggregate demand, the: A)economy will move up along curve B and output will temporarily increase. B)long-run aggregate supply curve C will shift upward. C)short-run aggregate supply curve B will automatically shift to the right. D)economy's output first will decline, then increase, and finally return to Q₁.

Question

Quizplus · Accepted Answer

When the price level rises above P₁ due to an increase in aggregate demand, the short-run aggregate supply curve B does not immediately shift to the right. Instead, output temporarily increases as the economy moves up along curve B. This is because firms are able to increase production and make a higher profit in the short-run due to the higher price level. In the long-run, however, the short-run aggregate supply curve B will shift to the right as firms adjust to the new price level and increase production further. Therefore, in the short-run, the economy moves up along curve B and output temporarily increases.

Refer to the Above Diagram