Suppose the economy is initially in long-run equilibrium.Which of the following best describes the effects of a shift in aggregate demand?
A) Prices and output are affected in the short run and in the long run.
B) Prices and output are affected only in the short run.
C) Prices are affected in the long run and in the short run, but output is affected only in the short run.
D) Prices are affected in the long run and in the short run, but output is affected only in the long run.

Question

Suppose the economy is initially in long-run equilibrium.Which of the following best describes the effects of a shift in aggregate demand?  
A) Prices and output are affected in the short run and in the long run. 
B) Prices and output are affected only in the short run. 
C) Prices are affected in the long run and in the short run, but output is affected only in the short run. 
D) Prices are affected in the long run and in the short run, but output is affected only in the long run.

Quizplus · Accepted Answer

In the short run, both prices and output can be affected by a shift in aggregate demand due to price and wage stickiness. However, in the long run, the economy adjusts back to its potential output, and only price levels remain affected as output returns to its natural rate.

Suppose the Economy Is Initially in Long-Run Equilibrium