Sia
Question
Statistics
Posted 7 months ago
The economy of Maxistan experienced a positive aggregate demand (AD) shock due to unbridled consumer optimism.
What will be the effect of this AD shock on Maxistan's level of output and unemployment rate in the long run?
Choose 1 answer:
(A) Output will increase; unemployment will decrease.
(B) Output will increase; unemployment rate will be unaffected.
(C) Output will increase; unemployment will increase.
(D) Output will be unaffected; unemployment rate will be unaffected.
(E) Output will be unaffected; unemployment will decrease.
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Answer from Sia
Posted 7 months ago
Solution by Steps
step 1
Consider the long-run implications of a positive aggregate demand (AD) shock in an economy
step 2
In the long run, according to the classical model of economics, the economy is self-correcting, and any changes in AD will only affect the price level, not the real output or unemployment
step 3
The long-run aggregate supply (LRAS) is vertical at the natural level of output, which is the level of output at full employment
step 4
A positive AD shock will initially increase output and decrease unemployment, but in the long run, the economy will return to the natural level of output, and the unemployment rate will return to the natural rate of unemployment
step 5
Therefore, in the long run, the level of output will be unaffected, and the unemployment rate will be unaffected by a positive AD shock
Answer
D
Key Concept
Long-Run Aggregate Supply Invariance
Explanation
In the long run, the level of output and unemployment rate are not affected by aggregate demand shocks due to the economy's return to the natural level of output and natural rate of unemployment.
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