If the current short-run equilibrium level of output is greater than full-employment output,we can then expect that in the long run the
A) price level will rise and short-run aggregate supply will fall.
B) price level will rise and aggregate demand will fall.
C) price level will fall and short-run aggregate supply will rise.
D) price level will fall and aggregate demand will rise.
E) long-run aggregate supply will increase.

Question

Quizplus · Accepted Answer

If the current short-run equilibrium level of output is greater than full-employment output, it means that there is excess demand in the economy which leads to firms increasing their prices in response to the shortage of goods and services. This causes an upward pressure on the price level. In the long run, as prices increase, the input prices of production also increase, leading to an increase in the cost of production. This causes a leftward shift in the short-run aggregate supply curve. Therefore, in the long run, we can expect a higher price level and a lower level of output (i.e., lower short-run aggregate supply).

If the Current Short-Run Equilibrium Level of Output Is Greater