Question
Question 25
Which of the following will most likely occur as the result of an unanticipated increase in aggregate demand?
(1) an increase in output and a move to a higher price level
(2) an increase in long-run aggregate supply (LRAS shifts to the right)
(4) an increase in prices and a long-run increase in output
(4)
Which of the following will most likely occur as the result of an unanticipated increase in aggregate demand?
(1) an increase in output and a move to a higher price level
(2) an increase in long-run aggregate supply (LRAS shifts to the right)
(4) an increase in prices and a long-run increase in output
(4)
Ask by Rose Beck. in Cayman Islands
Mar 31,2025
Upstudy AI Solution
Tutor-Verified Answer
Answer
Higher output and higher prices will occur as a result of the unanticipated increase in aggregate demand.
Solution
- The short-run aggregate demand (AD) curve shifts to the right due to the unanticipated increase in aggregate demand.
- In the short run, firms respond by increasing production, so output increases, and with higher demand, prices rise.
- In the long run, however, the economy’s potential output remains unchanged because an aggregate demand shock does not shift the long-run aggregate supply (LRAS).
- Therefore, the short-run result is higher output and higher prices, making option
correct.
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Simplify this solution Mind Expander
When there’s an unanticipated increase in aggregate demand, the economy typically responds by boosting output in the short run and pushing prices higher. This means we’d likely see option (1) play out: increased output and a higher price level as businesses ramp up production to meet the surge in demand. However, this growth might not be sustainable in the long run without corresponding adjustments in factors like supply or productivity.
Long-term responses to sustained increases in demand could vary, and while it might lead to shifts in long-run aggregate supply (LRAS), it’s not an automatic outcome. Often, the economy returns to its potential output with higher price levels, so the immediate effects dominate the scenario before any long-term adjustments come into play.
