If the aggregate supply curve is horizontal, an increase in aggregate demand will
A) increase both real and nominal GDP by the full multiplier effect.
B) increase nominal GDP but not real GDP.
C) increase the price level but not real GDP.
D) increase real GDP by less than the full multiplier effect because of rising prices.

Question

Quizplus · Accepted Answer

If the aggregate supply curve is horizontal (perfectly elastic), it means that the economy can produce any quantity of output at a fixed price level. Therefore, an increase in aggregate demand will result in an increase in both real and nominal GDP by the full multiplier effect, as there is no limit to the production capacity of the economy.

If the Aggregate Supply Curve Is Horizontal, an Increase in Aggregate