Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment. Show the short-run effect of this optimism on the aggregate-demand curve.
Aggregate DemandAggregate SupplyLRASPrice LevelQuantity of OutputAggregate Demand Aggregate Supply LRAS
Which of the following reasons could explain why the aggregate quantity of output supplied changes?
A. Wages are not sticky.
B. The price level has risen.
C. Prices are sticky.
D. People have misperceptions about the price level.

Aggregate Supply Curve = Shifts leftward.

Aggregate Demand Curve = Shifts Rightward.

In the short run, companies will become more optimistic and when they invest in new equipment, Aggregate supply curve shifts left because of the input prices of the new equipment.

Aggregate demand curve will shift right because of people will be optimistic about future business opportunities as well.

Reasons why aggregate quantity of output supplied changes.

B. The price level has risen.

C. Prices are sticky.

D. People have misperceptions about the price level.

The price level will rise in the short run due to the investment in more equipment and as prices are sticky, people will have misconceptions about the price level thinking that it will remain high which is why supply changes.

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answer; blank(1); /rises; blank(2); //increases;