Exhibit 10-7 Aggregate supply and demand curves In Exhibit 10-7, the aggregate demand and supply curves reflect an economy in which: A) full employment is at $1,000 billion GDP. B) excess aggregate supply is created when there is a shift from AD₁ to AD₂. C) excess aggregate demand forces prices up to P = 120. D) excess aggregate demand causes prices to stabilize at P = 110.

Question

Quizplus · Accepted Answer

The excess aggregate demand in the graph is causing prices to rise to P = 120. This is evident at the point where the aggregate demand curve intersects with the aggregate supply curve (point E in the graph). This point represents the equilibrium point where the quantity of goods and services demanded is equal to the quantity of goods and services supplied. However, at this point, the quantity demanded is greater than the quantity supplied, causing prices to increase.

Exhibit 10-7 Aggregate Supply and Demand Curves