If an increase in aggregate demand causes prices to increase slightly but output to increase significantly, then
A)the AS-curve must be very flat
B)the AD-curve must be very steep
C)the AD- and AS-curves must both be very steep
D)we must be looking at the very long-run AD-AS model
E)we must be looking at the very short-run AD-AS model

Question

Quizplus · Accepted Answer

If output is increasing significantly, it means that the economy has spare capacity, and therefore the AS curve must be very flat or horizontal. This means that a small increase in aggregate demand will lead to a large increase in output, but only a slight increase in prices. Therefore, A is the correct choice as it assumes a very flat AS-curve.

If an Increase in Aggregate Demand Causes Prices to Increase