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

Question

Quizplus · Accepted Answer

In the short run, both prices and output will adjust to changes in aggregate demand due to price and wage stickiness. However, in the long run, the economy returns to its potential output level, and only prices remain affected as the economy adjusts back to its natural rate of unemployment. Output returns to its long-run level, unaffected by the initial shift in aggregate demand.

If the Economy Is Initially in Long-Run Equilibrium, Which Statement