According to Keynesian theory,if equilibrium real GDP is below the full-employment level,then an increase in aggregate demand will result in which of the following changes in equilibrium?
A) Real GDP will rise, but the price level will remain constant.
B) Real GDP and the price level will both rise.
C) Real GDP will remain unchanged but the price level will rise.
D) None of the above.

Question

Quizplus · Accepted Answer

According to Keynesian theory, if equilibrium real GDP is below the full-employment level, then there is slack in the economy, and an increase in aggregate demand will lead to an increase in real GDP. However, since there is still available capacity in the economy, there won't be any upward pressure on prices. Hence, real GDP will rise, but the price level will remain constant. Therefore, option A is the correct choice.

According to Keynesian Theory,if Equilibrium Real GDP Is Below the Full-Employment