Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase in aggregate demand leads to a permanent increase in price levels
B
Increase in aggregate supply leads to higher unemployment
C
Increase in aggregate demand results in a proportional increase in output without affecting price levels
D
In the long run, the economy will adjust to the potential output where price levels stabilize
Understanding the Answer
Let's break down why this is correct
Answer
In the long run, both aggregate supply and demand work together to determine the overall price level in an economy. When demand increases, businesses may raise prices because more people want to buy their goods and services. However, if supply also increases, perhaps due to more workers or better technology, prices may not rise as much. For example, if a new factory opens and produces more cars, the increased supply can help keep prices stable even if many people want to buy cars. Ultimately, the balance between how much people want to buy and how much is produced shapes the price level over time.
Detailed Explanation
In the long run, the economy finds a balance. Other options are incorrect because Some might think that more demand always raises prices permanently; It's a common belief that more supply means more unemployment.
Key Concepts
Aggregate supply and demand
Price level adjustments
Topic
Long Run Economic Adjustment
Difficulty
medium level question
Cognitive Level
understand
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