Final answer:
The correct answer to the student's question is D) increase both the price level and real output. A rightward shift in the AD curve causes an expansionary effect, resulting in an increase in GDP and price level until the economy reaches potential output.
Step-by-step explanation:
Given a fixed upsloping Aggregate Supply (AS) curve, a rightward shift of the Aggregate Demand (AD) curve will lead to an increase in both the price level and real output. This scenario does not cause cost-push inflation, which is typically associated with a leftward shift in the AS curve. The rightward shift in the AD curve indicates an expansionary effect triggered by factors such as increased consumer confidence or expansionary monetary policy, leading to higher demand for goods and services, which pushes up both the GDP and the price level until potential output is reached.
As the AD curve shifts rightward in the short-run AS curve's intermediate zone, we would expect unemployment and inflation to move in opposing directions. This means that as output moves closer to potential GDP, unemployment would reduce, but there would be upward pressure on inflation due to higher prices.
Therefore, the correct answer to the question is D) increase both the price level and real output.