Consider the AD/AS model after factor prices have fully adjusted to output gaps.An increase in the level of potential output,with aggregate demand constant,will
A)affect only the price level.
B)decrease real GDP and the price level.
C)affect only the level of real GDP.
D)increase real GDP and lower the price level.
E)decrease real GDP and raise the price level.

Question

Quizplus · Accepted Answer

An increase in the level of potential output will shift the long-run aggregate supply (LRAS) curve to the right, increasing the potential level of real GDP. Since factor prices have already adjusted to output gaps, there will be no change in the price level in the long run. Therefore, the only effect will be an increase in real GDP and a lower price level.

Consider the AD/AS Model After Factor Prices Have Fully Adjusted