An aggregate demand shock will have a large effect on real GDP and a small effect on the price level when
A)the AS curve is steep.
B)the AD curve intersects the AS curve on the downward-sloping portion of the AS curve.
C)the AS curve is close to horizontal.
D)the AS curve is vertical.
E)the AD curve is steep.

Question

Quizplus · Accepted Answer

When the AS curve is close to horizontal, it means that there is a lot of spare capacity in the economy, and firms can increase output without having to increase prices significantly. This means that an increase in aggregate demand will lead to a large increase in real GDP but only a small increase in the price level.

An Aggregate Demand Shock Will Have a Large Effect on Real