An increase in aggregate demand is beneficial in the short run because ________,but harmful in the long run because ________.
A) output decreases; the unemployment rate falls
B) the unemployment rate falls; the price level rises
C) wages decrease; wages increase
D) real wealth decreases; real wealth increases
E) wages increase; the unemployment rate rises

Question

Quizplus · Accepted Answer

An increase in aggregate demand in the short run leads to an increase in output and a decrease in unemployment, which is beneficial. However, in the long run, the increase in demand leads to an increase in prices, which reduces the purchasing power of consumers and erodes the benefits of the initial increase in output and employment. Therefore, it can be harmful in the long run. Option B correctly captures these effects.

An Increase in Aggregate Demand Is Beneficial in the Short