Compared to the initial equilibrium, an initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in new long-run equilibrium with
A)a higher price level but the same real GDP.
B)a higher price level and an increased level of real GDP.
C)the same price level and a lower level of real GDP.
D)the same price level and the same real GDP.
E)None of the above answers are correct.

Question

Quizplus · Accepted Answer

In the absence of an increase in the quantity of money, an initial increase in aggregate demand would lead to a short-run increase in the price level and a temporary increase in output. However, in the long run, prices and wages adjust to the new level of output, leading to a higher price level but the same level of real GDP as before the increase in aggregate demand. This is known as the long-run equilibrium. Therefore, choice A is the best answer.

Compared to the Initial Equilibrium, an Initial Increase in Aggregate