According to modern Keynesian analysis, an increase in aggregate demand leads to a higher price level because the
A) aggregate demand curve is upward sloping.
B) short-run aggregate supply curve is upward sloping.
C) aggregate demand curve is upward horizontal.
D) short-run aggregate supply curve is vertical.

Question

Quizplus · Accepted Answer

In Keynesian analysis, the short-run aggregate supply curve is upward sloping, which means that as aggregate demand increases, firms are able to increase output in the short run by using their existing resources and labor more intensively. However, as output approaches full employment, firms will begin to experience diminishing returns and production costs will rise, causing the price level to increase. Thus, an increase in aggregate demand leads to a higher price level due to the upward sloping short-run aggregate supply curve.

According to Modern Keynesian Analysis, an Increase in Aggregate Demand