If an economy is in a long-run equilibrium and an unexpected increase in aggregate demand occurs, the temporary output will ____ and the permanent prices will ____. A. decrease, increase. B. increase, decrease. C. increase, increase. D. decrease, decrease.
C. increase, increase.
C) Both will increase !!!
C due to the shift to the right of the AD
C, This is an example of demand-pull inflation.
Yeah !! Aggregate demand changes alone cannot permanently change real output. An unexpected increase will, however, cause a temporary economic boom with a temporary increase in output. Aggregate demand changes can cause permanent changes in the price level. Thus, if aggregate demand increases and remains at the higher level the price level will increase and will remain at the higher level.
…and then AS will shift left since real wages increases without nominal wages keeping up. therefore AS will shift left and prices will increase even further (assuming new AD stays)