Final answer:
A shift in aggregate demand causes short-run price increases due to inelastic supply and demand, while in the long run, prices may rise or stabilize as the market adjusts and supply becomes more elastic.
Step-by-step explanation:
An economic expansion caused by a shift in aggregate demand causes prices to rise in the short run, and rise or potentially stabilize in the long run. In the short run, prices fluctuate more significantly because supply and demand are often inelastic, leading to a relatively greater change in prices with shifts in demand or supply.
Over time, however, as supply and demand become more elastic in the long run, quantity adjusts more, and the movements in prices are more muted.
For instance, if there is a surge in aggregate demand, businesses may not immediately increase their production due to constraints like long-term contracts, capacity limitations, or the time it takes to hire and train new workers. Consequently, the initial reaction is an increase in prices.
In the long run, as businesses adjust by expanding their operations, the increased supply can absorb some of the demand pressures, which may result in a stabilization of price levels, depending on the extent of the shift in aggregate demand relative to aggregate supply.