Aggregate demand and supply curves have been widely used to analyze the performance of the macroeconomy.Figure 5-3 shows four diagrams that represent different changes in the macroeconomy.Choose the diagram that best represents the situations described in the following questions.
Figure 5-3
-An increase in aggregate demand is most likely to result in
A)inflation.
B)recession.
C)economic stagnation.
D)a decrease in real GDP.

Question

Aggregate demand and supply curves have been widely used to analyze the performance of the macroeconomy.Figure 5-3 shows four diagrams that represent different changes in the macroeconomy.Choose the diagram that best represents the situations described in the following questions.
Figure 5-3 
-An increase in aggregate demand is most likely to result in
A)inflation. 
B)recession. 
C)economic stagnation. 
D)a decrease in real GDP.

Quizplus · Accepted Answer

An increase in aggregate demand leads to a shift to the right of the aggregate demand curve. This causes an increase in both price level and real GDP in the short run. However, if the increase in aggregate demand persists and the economy reaches full employment, the increased demand for inputs may lead to higher costs of production, leading to inflation. Therefore, an increase in aggregate demand is most likely to result in inflation. The diagram that best represents this situation is diagram (b), where there is a shift to the right of the AD curve, leading to an increase in both price level and real GDP in the short run.

Aggregate Demand and Supply Curves Have Been Widely Used to Analyze