Business cycles
Short run

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