Whether prices or real GDP exhibit the greater response to increased aggregate demand depends on the degree of capacity utilization in the economy.

Question

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When an increase in aggregate demand occurs, the response of prices and real GDP depends on the degree of capacity utilization. If the economy is operating at full capacity, an increase in AD is more likely to cause inflationary pressures and thus have a greater impact on prices than on real GDP. However, if there is unused capacity or unemployment in the economy, an increase in AD is more likely to boost real GDP than to cause inflation. Therefore, the degree of capacity utilization is an important factor in determining the response of prices and real GDP to increased aggregate demand.

Whether Prices or Real GDP Exhibit the Greater Response to Increased