Suppose the government increases aggregate demand to a level that increases GDP above its long-run equilibrium level. What sequence of events would follow?
A) prices rise; GDP increases; workers demand higher wages; short-run aggregate supply shifts to the left; GDP drops
B) prices fall; workers receive lower wages; short-run aggregate supply shifts to the right; GDP rises
C) prices rise; GDP increases; workers demand higher wages; long-run aggregate supply shifts to the left; GDP falls
D) prices fall; workers receive lower wages; aggregate supply shifts to the right; GDP rises

Question

Quizplus · Accepted Answer

When the government increases aggregate demand, GDP increases in the short run, causing prices to rise. As a result, workers demand higher wages, which causes short-run aggregate supply to shift to the left, and GDP drops. This is because the increase in prices is not sustainable in the long run and cannot be supported by the economy's productive capacity. As short-run aggregate supply shifts to the left, prices rise even more, causing a further recession in the economy.

Suppose the Government Increases Aggregate Demand to a Level That