If the aggregate demand curve shifts in the short run moving the economy out of long-run equilibrium:
A)the short-run aggregate supply curve will shift to bring it back into long-run equilibrium.
B)the aggregate demand curve will eventually shift back once expectations are taken into account.
C)inflation will always occur.
D)None of these is true.

Question

Quizplus · Accepted Answer

In the short run, if the aggregate demand curve shifts, it will cause a temporary deviation from the long-run equilibrium, resulting in either a recessionary or inflationary gap. To correct this deviation and bring the economy back to long-run equilibrium, the short-run aggregate supply curve will shift in response to changes in input prices (e.g., wages, raw materials) and productivity. Therefore, A is the correct choice. B is incorrect because the aggregate demand curve may not always shift back to its original position due to changes in expectations. C is incorrect because inflation may or may not occur, depending on the nature of the shift in aggregate demand and the response of the short-run aggregate supply curve. D is incorrect because A is true.

If the Aggregate Demand Curve Shifts in the Short Run