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A rightward shift in an aggregate demand will cause?

A rightward shift in an aggregate demand will cause?
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Answer #1

When the Aggregate demand curve shifts to the right from D to D1, the actual output will be greater than Potential output at LRAS(Long Run Aggregate Supply curve). When actual output is greater than potential, then unemployment falls below natural rate of unemployment. The higher output will increase in Price level in short run. However in the long run , the lower unemployment will cause increase in wages, and higher wages will increase the cost of production. Higher cost of production will cause short run Aggregate Supply curve to shift to the left from S to S1 and the output will fall back to potential output but at higher price level.

Short run

Long run

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