Short run

iDevice ikoon Short run developments
In the short run the increase in aggregate demand brings along the following effects:
  • as the total real expenditures are now higher than total real production producers are going to raise the product prices which means that inflation increases;
  • since factor prices are fixed in the short run but product prices have increased, producers are going to increase their production quantities;
  • in order to increase production quantities, producers` demand for labor increases and as a consequence unemployment decreases.

Short run developments induced by increase in AD are shown graphically below.


Figure 3. Increase in AD in the short run