Within the AD/AS model, an unanticipated increase in short-run aggregate supply will cause real output to
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A. B. C. D.D
An unanticipated increase in aggregate supply decreases the price level and increases current output. The long run aggregate supply of the country is not affected.
Within the AD/AS model, an unanticipated increase in short-run aggregate supply (SRAS) refers to a situation where the productive capacity of an economy unexpectedly improves. This can occur due to factors such as technological advancements, increased labor productivity, or favorable supply shocks.
In the short run, when there is an unanticipated increase in SRAS, it leads to an expansion of the economy's productive capacity. This means that businesses can produce more goods and services using the same amount of resources. As a result, the aggregate supply curve shifts to the right.
When the aggregate supply curve shifts to the right, it intersects the aggregate demand (AD) curve at a higher level of real output and a lower price level. This is because the increase in SRAS allows firms to produce more output at lower costs, leading to lower prices in the short run.
Therefore, the correct answer is D. Real output will expand, and prices will fall.
Option A, which states that real output will decline and prices will fall, is incorrect. An increase in SRAS implies an expansion in output, not a decline.
Option B, which suggests that real output will decline and prices will rise, is also incorrect. An increase in SRAS leads to lower prices, not higher prices.
Option C, which indicates that real output will expand and prices will rise, is incorrect. While real output will indeed expand, an unanticipated increase in SRAS will cause prices to fall, not rise.
Remember that in the long run, the economy tends to adjust, and the SRAS curve becomes vertical. In the long run, changes in SRAS do not affect output but only impact the price level. However, this question specifically asks about the short run, where an unanticipated increase in SRAS leads to an expansion of real output and a decrease in prices.