Based on the Keynesian theory of the business cycle, if the economy is at its full- employment equilibrium and aggregate demand increases then
A) the price level and GDP both decrease.
B) real GDP decreases and the price level remains unchanged.
C) the price level and real GDP both increase.
D) the price level rises but real GDP remains unchanged.

Question

Quizplus · Accepted Answer

According to Keynesian theory, an increase in aggregate demand from full employment equilibrium results in an increase in both price level and real GDP, known as demand-pull inflation. This is because in the short run, firms increase output to meet the demand, leading to an increase in employment and overall output. However, in the long run, this may lead to inflationary pressures as the economy approaches its productive capacity. Therefore, the correct answer is C, as both the price level and real GDP increase in the short run.

Based on the Keynesian Theory of the Business Cycle, If