Exhibit 22-3 In Exhibit 22-3,at point B an increase in AD would lead to:
A) an increase in the price level and an increase in real GDP.
B) an increase in the price level and a decrease in real GDP.
C) an increase in the price level and no change in real GDP.
D) no change in the price level and an increase in real GDP.

Question

Exhibit 22-3  In Exhibit 22-3,at point B an increase in AD would lead to:
A) an increase in the price level and an increase in real GDP. 
B) an increase in the price level and a decrease in real GDP. 
C) an increase in the price level and no change in real GDP. 
D) no change in the price level and an increase in real GDP.

Quizplus · Accepted Answer

At point B, the economy is operating below its potential GDP, meaning that there is a spare capacity for production. An increase in aggregate demand would stimulate firms to increase production, leading to an increase in real GDP. However, since the economy is already producing below its potential, the increase in output would put upward pressure on the price level, resulting in an increase in inflation. Therefore, an increase in AD would lead to both an increase in price level and an increase in real GDP at point B.

Exhibit 22-3 in Exhibit 22-3,at Point B an Increase