Question

what happens in the long run if policymakers make no change in macroeconomic policy? the price level will be lower and employment will return to its full-employment level. , not selected incorrect answer: the price level will be unchanged and employment will return to its full-employment level. the price level will be unchanged and employment will be lower. , not selected the price level will be lower and employment will be lower.

Answer 1

Increasing aggregate demand in the short run will lead to higher output and a higher price level, but in the long run, the economy will adjust and return to its full-employment level of output at a higher price level.

Step-by-step explanation:

In the short run, increasing aggregate demand to achieve an unemployment rate of zero percent will lead to higher output and a higher price level. This is because higher aggregate demand encourages businesses to increase production and hire more workers, resulting in an increase in output and prices. However, in the long run, the neoclassical perspective suggests that the economy will adjust and return to its full-employment level of output but at a higher price level. This is because in the long run, prices and wages adjust to reflect changes in aggregate demand, leading to a higher price level.

To illustrate this, we can refer to the aggregate demand/aggregate supply (AD/AS) diagram. In the short run, the AD curve would shift to the right, leading to an increase in both output and the price level. In the long run, as prices and wages adjust, the AS curve would shift to the left, bringing output back to its full-employment level but at a higher price level.