Based on the Keynesian theory of the business cycle, if the economy is at its full-employment equilibrium and aggregate demand increases then
A) the price level and real GDP both increase.
B) the price level rises but real GDP remains unchanged.
C) the price level and GDP both decrease.
D) real GDP decreases and the price level remains unchanged.

Question

Quizplus · Accepted Answer

According to the Keynesian theory of the business cycle, if the economy is at its full-employment equilibrium and aggregate demand increases, the increase in demand will lead to an increase in both the price level and real GDP. This is because firms will increase production to meet the higher demand, leading to an increase in aggregate output and income. As the economy approaches full employment, firms may also begin to increase prices to maintain profitability, leading to a rise in the price level.

Based on the Keynesian Theory of the Business Cycle, If