Exhibit 10-6 Aggregate supply curve

In Exhibit 10-6, when the economy moves from a GDP of $1,000 billion to a GDP of $1,100 billion,
A) higher wages will lower the cost of producing goods.
B) real GDP and employment both increase, but only under conditions of constant prices.
C) real GDP increases and employment decreases, but only under conditions of price level increases.
D) real GDP and employment both increase, but only under conditions of price level increases.

Question

Exhibit 10-6 Aggregate supply curve

In Exhibit 10-6, when the economy moves from a GDP of $1,000 billion to a GDP of $1,100 billion,
A) higher wages will lower the cost of producing goods. 
B) real GDP and employment both increase, but only under conditions of constant prices. 
C) real GDP increases and employment decreases, but only under conditions of price level increases. 
D) real GDP and employment both increase, but only under conditions of price level increases.

Quizplus · Accepted Answer

According to the aggregate supply curve, as GDP increases from $1,000 billion to $1,100 billion, there is upward pressure on prices which will cause the price level to increase. This is represented by the movement from point A to point B on the curve. However, real GDP and employment both increase as well, indicating that there is expansionary growth in the economy. Therefore, the correct answer is D, real GDP and employment both increase but only under conditions of price level increases.

Exhibit 10-6 Aggregate Supply Curve