Question

In the macroeconomy, demand-side shifts change: a) only the price level in the long run, while output eventually returns to its long-run potential level. b) only the output level in the long run, while prices eventually return to their long-run potential levels. c) aggregate demand only, which eventually shifts back in the long run. d) aggregate demand only, which is why the price level remains unaffected in the long run.

Answer 1

The correct answer is option a.

Step-by-step explanation:

In the long run, the aggregate level of output does not change with a change in demand. An increase in demand causes the price level to increase. But the aggregate output level increases only when the availability of resources increases or there is an improvement in the state of technology or both.

An increase in price due to increased demand does not cause the supply to increase as the input prices increase as well.