Question

magine the u.s. economy is in long-run equilibrium. then suppose the aggregate demand increases. we would expect that in the long-run the price level would

Answer 1

In the long-run equilibrium of the U.S. economy, an increase in aggregate demand leads to higher price levels, reflecting inflationary pressures, while real GDP and the level of unemployment remain unchanged.

Step-by-step explanation:

If the U.S. economy is in long-run equilibrium and the aggregate demand increases, the long-run effect according to the neoclassical model would be an increase in the price level. This scenario is depicted in figures such as Figure 26.8 and Figure 13.8, which illustrate a vertical Long-Run Aggregate Supply curve (LRAS). As aggregate demand shifts to the right, from AD to AD₁ to AD₂, real GDP and the level of unemployment remain constant in the long run. The macroeconomic equilibrium moves from Eo to E₁ to E₂, and during this transition, only the price level increases, signaling inflationary pressures. Conversely, if aggregate demand decreases, the price level decreases, but real GDP and the natural rate of unemployment again do not change.