Question

In the short run, policy that changes aggregate demand changes
a. both unemployment and the price level.
b. neither unemployment nor the price level.
c. only the unemployment.
d. only the price level.

Answer 1

The equilibrium Price and quantity will be attained when AD curve intersects AS curve.

AD=C+I+G+X-M

With the change in the AD, the AD curve shifts and it change the equilibrium price as well as output production. When output level changes then, the employment level will also change. Hence unemployment level will also change.

The price level also changes.

For example when there is decrease in the income taxes due tax reform, so the disposable income increases, hence the AD will increases .This is because with more disposable income both saving and consumption increases.

Therefore AD curve shifts rightward from AD to AD1 and vice-versa with the increase in the income tax.

As a result equilibrium price (inflation) increase and output (GDP) also increases.

Hence option a is the correct answer.