Final answer:
An expansionary AD shock results in a positive price-level effect in the short run and continues to be positive but smaller in the long run, primarily resulting in inflation once the economy reaches potential GDP.
Step-by-step explanation:
Using the AD/AS macroeconomic model, an expansionary AD shock would typically have a positive price-level effect in the short run as the demand increase leads to higher prices. Over time, in the long run, if the expansionary policy persists and the economy is at or near potential GDP, this higher aggregate demand can only lead to further inflation without increases in actual output. This would imply that the price-level effect in the long run is also positive, but not necessarily larger if the economy is already at full employment, leading to purely inflationary pressures. Hence, the correct answer to the question is B) a positive; a smaller.
In the short run, firms may increase output to meet higher AD, causing prices to rise (inflation). However, once at potential GDP, additional increases in AD cannot increase output further and lead only to higher prices. This dynamic illustrates why the long-run effect on the price level is positive but smaller than the short-run effect since, in the long-run, sustained expansionary policies result in inflation without corresponding increases in real GDP.