If the economy is operating at a point at which short-run aggregate supply is horizontal, then
A) real GDP cannot expand.
B) real GDP cannot contract.
C) increases in aggregate demand do not increase the price level.
D) then increases in aggregate demand do not increase real GDP.

Question

Quizplus · Accepted Answer

When short-run aggregate supply is horizontal, it means that the economy is operating at full capacity and any increase in aggregate demand will lead to an increase in real GDP without any increase in the price level. Therefore, increases in aggregate demand do not increase the price level, making option C the correct answer. Options A and B are incorrect because real GDP can still expand or contract within the limits of the horizontal SRAS curve. Option D is also incorrect since an increase in aggregate demand will increase real GDP without causing inflation.

If the Economy Is Operating at a Point at Which