Starting from a position of long- run equilibrium, suppose that a shock causes the aggregate demand curve to shift rightward. If the RBA does nothing,
A)eventually the short- run aggregate supply curve will shift leftward and there will be continued inflation.
B)the economy will experience a temporary reduction in employment but will eventually return to full employment.
C)the short- run aggregate supply curve will not shift leftward and there will be continued inflation.
D)output initially will exceed potential GDP, but the economy will return to potential GDP with a higher price level.

Question

Quizplus · Accepted Answer

In the long run, the economy self-adjusts. A rightward shift in aggregate demand initially increases output above potential GDP, causing upward pressure on prices. Eventually, the short-run aggregate supply curve shifts leftward, returning output to potential GDP but at a higher price level.

Starting from a Position of Long- Run Equilibrium, Suppose That