If the aggregate supply curve has its normal shape, deficit spending will increase
A)both GDP and the price level at about the same rate.
B)the price level before it increases real GDP.
C)the price level but decrease real GDP.
D)real GDP before it increases the price level.

Question

Quizplus · Accepted Answer

Deficit spending typically leads to an increase in aggregate demand. When the aggregate supply curve has its normal upward-sloping shape, an increase in aggregate demand first raises real GDP (output) and then, as the economy approaches its capacity, leads to higher prices. This is because initially, there are idle resources that can be utilized to meet higher demand, but as the economy gets closer to full employment, additional increases in demand are more likely to result in higher prices rather than substantial increases in output.

If the Aggregate Supply Curve Has Its Normal Shape, Deficit