Suppose that the economy is at full employment and aggregate demand increases by more than it is anticipated to increase. Other things remaining the same, _ .
A) real GDP decreases below potential GDP
B) real GDP increases above potential GDP
C) real GDP remains at potential GDP
D) long- run aggregate supply decreases

Question

Quizplus · Accepted Answer

When aggregate demand increases by more than anticipated, businesses will increase production to meet the higher demand, leading to an increase in real GDP above potential GDP. This usually results in higher prices and inflation in the short run. However, in the long run, wages and other input costs will adjust to the higher prices, causing the economy to return to its potential GDP level.

Suppose That the Economy Is at Full Employment and Aggregate