Suppose the economy is initially in long-run equilibrium then aggregate demand rises. What will happen in the long run?

Question

Business

Aditya Sloan

7 January, 18:58

Suppose the economy is initially in long-run equilibrium then aggregate demand rises. What will happen in the long run?

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Answers (1)

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Little Bear · Answer 1

Answer with Explanation:

Once the aggregate demand rises, this means that the consumers have the capacity or are willing to purchase more of the goods and services. Once this happens for a prolonged period of time, inflation will result. This means that the prices of goods will increase at the same quantity being offered.

The increase in the prices of goods happens because once the demand of the consumer increases, the producers would try their best to meet that demand. This is effective in the short-run. However, it is hard to accommodate such huge demand in the long-run. So, this mean that the producers will have to increase the price level of the goods. This will then lower the aggregate expenditures of the consumers.

So, this explains the answer.