An initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in a 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) None of the above answers are correct.

Question

Quizplus · Accepted Answer

An initial increase in aggregate demand that is not followed by an increase in the quantity of money leads to a short-run increase in prices and output due to the temporary decrease in unemployment, but in the long run, prices will return to their initial level as wages and input prices adjust. Real GDP will remain constant, as there has been no change in the inputs of the economy. Thus, choice A is the correct answer.

An Initial Increase in Aggregate Demand That Is NOT Followed