An increase in aggregate demand will have a smaller long-run effect on real GDP if the:
A)aggregate demand curve is flat.
B)short-run aggregate supply curve is horizontal.
C)economy is well below potential output.
D)economy is already at potential output.
E)aggregate demand curve is fairly steep.

Question

Quizplus · Accepted Answer

If the economy is already at potential output (full employment), an increase in aggregate demand will only lead to higher prices and not a significant increase in real GDP in the long run. This is because potential output is the maximum level of output an economy can produce in the long run, given its resources and technology.

An Increase in Aggregate Demand Will Have a Smaller Long-Run