In the long-run persistent increases in aggregate demand will:

Question

BlackTom AI · Accepted Answer

Consider the basic macroeconomic idea that in the long run, aggregate supply is vertical at the economy’s potential real GDP, so persistent increases in aggregate demand primarily push up the price level rather than the quantity of output produced.

Option A: 'result in inflation with no changes in real GDP' — This aligns with the classical long-run view: money demand drives prices up (inflation), while real GDP returns to its potential and remains unchanged. The result is higher price level but unchanged real output.

Option B: 'inflation with no changes in nominal GDP' — Although inflation occurs, nominal GDP would not stay unchanged. Since nominal GDP is the product of the price level and real GDP, and real GDP is unchanged in the long run while prices rise, nominal GDP increases. Therefore this statement is incorrect.

Option C: 'deflation with no changes in nominal GDP' — Deflation contradicts the effect of a persistent increase in aggregate demand, which tends to raise prices, not lower them. Additionally, nominal GDP would move with price changes, so the claim of no change in nominal GDP is unlikely. This makes it incorrect.

Option D: 'deflation with no changes in real GDP' — Again, deflation is the wrong direction for a persistent AD increase, and real GDP would remain unchanged only in the sense of being at potential; the deflation part makes this option incorrect.

In summary, the only statement that matches the long-run outcome of a sustained AD increase is option A: inflation with no changes in real GDP.

In the long-run persistent increases in aggregate demand will:

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