An aggregate demand (AD)shock will have a small effect on real GDP and a large 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 AD curve is steep.
E)the AD curve is flat.

Question

Quizplus · Accepted Answer

When the AS (Aggregate Supply) curve is steep, it indicates that the economy is operating at or near full capacity. In this situation, any increase in aggregate demand (AD) will have a limited effect on real GDP because there is little spare capacity to increase output. Instead, the increase in demand is more likely to lead to higher prices, resulting in a large effect on the price level and a small effect on real GDP.

An Aggregate Demand (AD)shock Will Have a Small Effect on Real