Increased AD Shifts Output Along Horizontal AS Curve

Steps:

• Perfectly elastic aggregate supply (AS) creates a horizontal AS curve, indicating constant price level regardless of output changes.
• Rising aggregate demand (AD) shifts the AD curve rightward.
• New equilibrium occurs at higher real output level on the same horizontal AS line.
• Price level remains unchanged due to infinite supply elasticity at that price.

Why B is correct:

• Real output rises as the horizontal AS allows unlimited production increase without price adjustment, per the AD-AS model.

Why the others are wrong:

• A: No labour shortages occur, as elastic AS implies abundant resources without capacity constraints.
• C: Price level stays constant with horizontal AS, preventing inflation.
• D: Wage rates do not rise, as no cost-push pressures emerge from unchanged prices.

Final answer: B