A shock that decreases input prices but does not increase the full-employment le

Question

A shock that decreases input prices but does not increase the full-employment level of output will result in:

A) A lower price level in the short run and higher output in the long run
B) An increase in aggregate demand
C)Greater output in the short run and no change in the price level in the long run
D) Greater output in the short run and a higher price level in the long-run
E) Greater output in the short run and a lower price level in the long run

I can visualize the LRAS, short-run AS and AD in equilibrium. The decrease in input prices will cause the AS to shift to the right , increasing RGDP and decreasing the price level in the short run. However, what will happen to the AD at this time? I know the AD has to shift to accompany a long-term change. Will it shift to the right or left? Where will the equilibrium be on the LRAS now?

What is the correct answer here and why?

Explanation / Answer

A IS THE RIGHT OPTION BECAUSE IF THE COMPANY CHOOSES TO SELL MORE OUTPUT IT REDUCE THE PRICE WHICH LEAD TO INCREASE IN AD . SO IN THE LONG RUN TO MATCH THIS INCREASED AD AS MUST INCRESE WHICH MEANS HIGHER OUT PUT IN THE LONG RUN

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