In the short run, an increase in aggregate demand
A) lowers the price level and increases real GDP.
B) raises the price level and decreases real GDP.
C) raises the price level and increases real GDP.
D) lowers the price level and decreases real GDP.

Question

Quizplus · Accepted Answer

An increase in aggregate demand leads to a higher quantity of goods and services demanded at every price level. In the short run, firms may not be able to increase production immediately to meet this demand, leading to an increase in the overall price level. However, output and employment also increase, leading to an increase in real GDP. Therefore, the correct choice is C.

In the Short Run, an Increase in Aggregate Demand