The figure to the right shows the result of an increase in aggregate demand from

Question

The figure to the right shows the result of an increase in aggregate demand from ADo to AD1. In its new short run equilibrium the economy is AS(Long run) resting | its potential output. ASo (Short run) Because the economy is producing beyond its potential output level, input prices and hence production costs are being pushed upward Using either the line drawing tool or the 3-point curved line drawing tool illustrate the impact of rising production costs. Properly label your new line or curve Note: Carefully follow the instructions above and only draw the required object. AD According to your figure, the eventual long-run impact of the increase in aggregate demand is AD ( higher prices, unchanged output. O B. higher output, unchanged prices Yo Y Aggregate output (income), Y ° C. higher prices, higher output. O D. higher prices, lower output.

Explanation / Answer

With the change in the aggregate demand as the aggregate demand curve shifts rightwards, the economy is above its potential output.

As production costs increase this will mean the level of aggregate supply will fall. This will cause the short run aggregate supply curve to shift leftwards to AS1 as the economy moves back to the potential output level. Prices rise and output falls.

The correct answer is A. As AD rises, prices willl rise and output rises. In the long run the prices rise further as the economy moves back to long run equilibrium. The correct answer is A.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.