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

Question

Quizplus · Accepted Answer

When there is an initial increase in aggregate demand but not followed by an increase in the quantity of money, there will be a temporary increase in both the price level and real GDP in the short-run. However, in the long-run, the economy will adjust and the price level will remain high but the level of real GDP will return to its original equilibrium level. This is known as the long-run aggregate supply curve, which is vertical at the potential output level, indicating that changes in aggregate demand do not have a permanent effect on real GDP. Therefore, the best choice is B, a higher price level but the same level of real GDP.

An Initial Increase in Aggregate Demand That Is NOT Followed