An unexpected increase in total spending will cause an increase in GDP
A) if prices are sticky.
B) if prices are fully ﬂexible.
C) regardless of whether prices are sticky or fully ﬂexible.
D) only if prices are stuck in the long term.

Question

Quizplus · Accepted Answer

When prices are sticky, they do not adjust immediately to changes in supply and demand. Therefore, an unexpected increase in total spending will more likely lead to an increase in output and employment, thus increasing GDP, because firms respond to the higher demand mainly by increasing production rather than by raising prices.

An Unexpected Increase in Total Spending Will Cause an Increase