Suppose the government increases aggregate demand to a level that increases GDP

Question

Suppose the government increases aggregate demand to a level that increases GDP above its long-run equilibrium level. What sequence of events would follow? A)Prices rise; nominal GDP increases; workers demand higher wages; short-run aggregate supply shifts to the left; GDP drops B)Prices fall; workers receive lower wages; short-run aggregate supply shifts to the right; GDP rises C)Prices rise; nominal GDP increases; workers demand higher wages; long-run aggregate supply shifts to the left; GDP falls D)Prices fall; workers receive lower wages; aggregate supply shifts to the right; GDP rises

Explanation / Answer

A)Prices rise; nominal GDP increases; workers demand higher wages; short-run aggregate supply shifts to the left; GDP drops

AD and AS curve is between Price level and real GDP.

Increase in AD increases Price and thus nominal GDP.

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