Suppose the economy is initially in long-run equilibrium Then suppose there is an increase in military spending due to rising international tensions According to the model of aggregate demand and aggregate supply what happens to prices and output in the short run ?
Correct answer: D. Price rise; output rise
- A. Price fall; output rises
- B. Price fall; output falls
- C. Price rise; output fall
- D. Price rise; output rise
Explanation
Higher military spending increases aggregate demand, shifting the AD curve right. In the short run, this raises both the price level and output.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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