Suppose an economy has an upward-sloping aggregate supply curve and a recessionary GDP gap equal to $50 billion.If aggregate demand increases by a total of $50 billion,
A)The recessionary GDP gap will be eliminated.
B)The resulting equilibrium GDP will be lower than full employment GDP because some of the additional spending will drive up prices instead of increasing output.
C)The resulting equilibrium GDP will be greater than full-employment GDP because of demand-pull inflation.
D)Cyclical unemployment will increase.

Question

Quizplus · Accepted Answer

When aggregate demand increases by $50 billion in an economy with an upward-sloping aggregate supply curve, not all of the increase will translate into higher output due to rising prices. This means the equilibrium GDP will still be below full employment GDP.

Suppose an Economy Has an Upward-Sloping Aggregate Supply Curve and a Recessionary