A demand shock that increases real GDP above its full-employment level will,in the long run,
A) lead to a higher wage rate and an upward shift of the aggregate supply curve
B) lead to a lower wage rate and a downward shift of the aggregate supply curve
C) lead to a higher wage rate and a rightward shift of the aggregate demand curve
D) lead to a lower wage rate and a leftward shift of the aggregate demand curve
E) cause no further shifts in the aggregate supply or aggregate demand curve

Question

Quizplus · Accepted Answer

The initial demand shock will cause an increase in both real GDP and the price level in the short run. However, in the long run, firms will adjust their prices and wages to match the higher level of output. This will lead to an increase in the wage rate as firms compete for workers, which will cause an upward shift of the aggregate supply curve. As a result, the economy will return to its full-employment level, with a higher price level and a higher level of output than before the demand shock.

A Demand Shock That Increases Real GDP Above Its Full-Employment