Refer to the graph. Assume that the economy is initially at full-employment equilibrium at point A. If AD increases, then the long-run equilibrium point will be at point
A) A.
B) B.
C) C.
D) D.

Question

Refer to the graph. Assume that the economy is initially at full-employment equilibrium at point A. If AD increases, then the long-run equilibrium point will be at point
A) A. 
B) B. 
C) C. 
D) D.

Quizplus · Accepted Answer

If AD increases, there will be higher demand for goods and services in the economy. This will lead to an increase in output and prices in the short-run, moving the economy from point A to point B.
However, in the long-run, prices will adjust to the higher demand and the economy will move along the vertical AS curve towards point C, which is the new full-employment equilibrium point.
At point C, output is higher than the initial level at point A, but prices have also increased, leading to no change in the unemployment rate. Therefore, point C represents the long-run equilibrium point after an increase in AD.

Refer to the Graph