If factor prices remain constant, an increase in aggregate demand
A)increases the price level and increases real GDP.
B)increases the price level and decreases real GDP.
C)decreases the price level and increases real GDP.
D)decreases the price level and decreases real GDP.
E)increases the price level, and leaves real GDP unchanged.

Question

Quizplus · Accepted Answer

If factor prices remain constant, an increase in aggregate demand will result in an increase in output and jobs, leading to an increase in the price level and real GDP. This is due to the fact that firms will have to pay overtime wages or hire more workers, increasing the production costs, leading them to increase prices to make a profit. Hence, choice A is the correct answer.

If Factor Prices Remain Constant, an Increase in Aggregate Demand