Starting from long-run equilibrium, an increase in aggregate demand will cause
A)a decrease in production in the short run.
B)an increase in employment in the short run.
C)a decrease in the price level.
D)downward pressure on wage rate.

Question

Quizplus · Accepted Answer

An increase in aggregate demand will lead to an increase in output and employment in the short run, causing the economy to temporarily move away from the long-run equilibrium. This is because firms will need to increase production to meet the higher demand, leading to an increase in employment. However, in the long run, as wages and prices adjust, the economy will return to the original long-run equilibrium with a higher price level but the same level of output and employment. Therefore, choice B is the correct answer.

Starting from Long-Run Equilibrium, an Increase in Aggregate Demand Will