Suppose the economy is initially in long-run equilibrium and aggregate demand rises. In the long run prices
A) and output are higher than in the original long-run equilibrium.
B) and output are lower than in the original long-run equilibrium.
C) are higher and output is the same as the original long-run equilibrium.
D) are the same and output is lower than in the original long-run equilibrium.

Question

Quizplus · Accepted Answer

In the long run, the economy returns to its potential output level, so output remains the same. However, the increase in aggregate demand leads to higher prices.

Suppose the Economy Is Initially in Long-Run Equilibrium and Aggregate