In the long run, persistent increases in aggregate spending will:

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BlackTom AI · Accepted Answer

The question asks about the long-run effect of persistent increases in aggregate spending. In the long run, aggregate spending increases (a sustained rise in aggregate demand) tend to push the price level up, but real GDP returns to its natural level due to the classical dichotomy and adjustments in input prices and wages.

Since there are no answer options provided to critique, I will focus on validating the statement that such persistent spending increases lead to inflation with no lasting change in real GDP.

1) Core idea: In the long run, real variables (like real GDP) are determined by supply-side factors (potential output, resources, technology) and are unaffected by demand shocks after prices and wages adjust. Therefore, a persistent rise in aggregate spending mainly shifts the aggregate price level upward, causing inflation. 
2) Mechanism: An initial demand shock increases aggregate demand, raising output and employment in the short run. However, as input prices (including wages) adjust upward due to higher demand for resources, the short-run aggregate supply curve shifts leftward, eroding any temporary gains in real GDP and leaving the economy at the same potential output but at a higher price level. 
3) Long-run outcome: Real GDP returns to potential output (no permanent increase) while the price level is elevated, i.e., inflation persists without a sustained real GDP increase.

If any alternative options had been present, we would compare them along these lines: options claiming lasting real GDP growth from a demand shock would be incorrect in the standard long-run classical view; options claiming no inflation would be incorrect because persistent demand increases generally produce higher price levels in the long run; and options suggesting deflation or other outcomes would be evaluated against the same supply-demand adjustment logic.

Note: The provided data shows an answer field indicating the correct idea, but no answer options are present to evaluate individually. The explanation above aligns with the widely taught long-run neutrality of money and the tendency for inflation without a permanent real GDP change when aggregate spending increases persistently.

ECON1002 Introductory Macroeconomics

In the long run, persistent increases in aggregate spending will:

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