Imagine the U.S.economy is in long-run equilibrium.Then suppose the aggregate demand increases.We would expect that in the long-run the price level would
A)increase.
B)decrease.
C)stay the same.
D)decrease by the same amount as the increase in aggregate demand.

Question

Imagine the U.S.economy is in long-run equilibrium.Then suppose the aggregate demand increases.We would expect that in the long-run the price level would
A)​increase.
B)​decrease.
C)​stay the same.
D)​decrease by the same amount as the increase in aggregate demand.

Quizplus · Accepted Answer

In the long-run, output returns to its natural level, and the economy reaches the potential output. An increase in aggregate demand that persists in the long-run will only cause an increase in the price level, but not output, as the supply curve is vertical in the long-run. Therefore, the correct answer is A, an increase in price level.