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 long run ?
Correct answer: D. Prices rise; output is unchanged from its initial value
- A. Output falls; prices are unchanged from the initial value
- B. Price fall; output is unchanged from its initial value
- C. Output and the price level are unchanged from their initial values
- D. Prices rise; output is unchanged from its initial value
Explanation
Higher military spending shifts aggregate demand right, raising output temporarily. In the long run output returns to its natural level, while the higher aggregate demand leaves the price level higher.
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