Suppose we observe the price level increasing and real GDP decreasing. An explanation for this is that
A) the dollar weakened and the effect on aggregate supply was less than the effect on aggregate demand.
B) the dollar weakened and the effect on aggregate supply was greater than the effect on aggregate demand.
C) the dollar strengthened and the effect on aggregate supply was less than the effect on aggregate demand.
D) the dollar strengthened and the effect on aggregate supply was greater than the effect on aggregate demand.

Question

Quizplus · Accepted Answer

A decrease in real GDP suggests a decrease in aggregate supply. Meanwhile, an increase in price level suggests an increase in aggregate demand. If the dollar weakened, it would lead to an increase in price level and aggregate demand. However, if the effect on aggregate supply was greater than the effect on aggregate demand, we would observe a decrease in real GDP alongside an increase in price level.

Suppose We Observe the Price Level Increasing and Real GDP