An economy has recently experienced an increase in Aggregate Demand and is currently in the short-run equilibrium that resulted from this change. As this economy transitions from the short run into long run equilibrium the _____ curve will shift, resulting in a ___________ price level.

• A. AD, lower
• B. AD, higher
• C. SRAS, lower
• D. SRAS, higher

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the scenario — an increase in Aggregate Demand (AD) shifts the AD curve to the right, causing a higher output and price level in the short run, leading to a new short-run equilibrium.
2. Step 2: Recognize that in the short run, prices and wages are sticky, so firms respond to higher demand by increasing output and prices, but this is not sustainable in the long run.
3. Step 3: As the economy moves toward long-run equilibrium, input prices (like wages) adjust upward due to higher demand for resources, which causes the Short-Run Aggregate Supply (SRAS) curve to shift.
4. Step 4: Specifically, the SRAS curve shifts to the left (upward) because higher input costs reduce the quantity of goods and services firms are willing to supply at each price level.
5. Step 5: This leftward shift of the SRAS curve results in a higher overall price level in the long run, restoring output to its natural level but at a higher price.