11.4 Consequences of Changes in Aggregate Demand

-Refer to the above figure. An increase in aggregate demand between real Gross Domestic Product (GDP)levels Y₀ and Y₁
A)would most likely result in some inflation.
B)would not increase output since the economy is already working at full capacity.
C)would have no effect on the price level.
D)would cause price levels to fall.

Question

11.4 Consequences of Changes in Aggregate Demand
 
-Refer to the above figure. An increase in aggregate demand between real Gross Domestic Product (GDP)levels Y₀ and Y₁
A)would most likely result in some inflation. 
B)would not increase output since the economy is already working at full capacity. 
C)would have no effect on the price level. 
D)would cause price levels to fall.

Quizplus · Accepted Answer

An increase in aggregate demand between real GDP levels Y₀ and Y₁ would result in a shift from AD₀ to AD₁, leading to an increase in both output and price level. As the economy moves closer to full employment, firms may face higher production costs, such as wages leading to inflation, making choice A the correct answer. Choice B is incorrect as there is still room for output to increase before reaching full capacity. Choice C is also incorrect as a change in aggregate demand would affect the price level. Choice D is incorrect as an increase in aggregate demand would cause price levels to rise rather than fall.