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Suppose that the economy is in long-run macroeconomic equilibrium, experiencing full employment, when the Aggregate Demand...

Suppose that the economy is in long-run macroeconomic equilibrium, experiencing full employment, when the Aggregate Demand Curve shifts to the right. In the short run, the economy experiences a(n) ___________ gap with _______________.
inflationary; low unemployment
recessionary; low inflation
recessionary; high inflation
inflationary; high unemployment
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Answer #1

Answer : The answer is option A.

Currently the economy is at full employment level. Now if the aggregate demand curve shift to rightward then in short-run the economy faces a situation of inflationary gap. As a result, the price level and real GDP both increases in short-run. Increase in real GDP increase the employment level which decrease the unemployment. Therefore, option A is correct.

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