An unexpected increase in aggregate demand typically causes
A) frictional unemployment to increase but structural unemployment to decrease.
B) the price level to increase but has no effect on the unemployment rate.
C) the price level to increase and the unemployment rate to fall.
D) the price level to increase and the unemployment rate to increase.

Question

Quizplus · Accepted Answer

An unexpected increase in aggregate demand leads to an increase in the level of output in the short-run. Firms respond to the increase in demand by hiring more workers and increasing production. As a result, the unemployment rate falls. However, the increase in demand also puts pressure on prices, and the price level increases as firms experience shortages of inputs and increase prices to restore profit margins. Thus, an unexpected increase in aggregate demand causes the price level to increase and unemployment rate to fall.

An Unexpected Increase in Aggregate Demand Typically Causes