If the economy's AS curve is upward sloping,a positive aggregate demand shock will result in
A)an increase in prices but not output.
B)an increase in output but not prices.
C)an increase in both output and prices.
D)a decrease in both output and prices.
E)a decrease in output and an increase in prices.

Question

Quizplus · Accepted Answer

If the economy's AS curve is upward sloping, a positive aggregate demand shock will lead to an increase in both output and prices. An upward sloping AS curve signifies the existence of surplus capacity and resources at lower levels of output. Hence, firms can increase output in response to an increased demand for their goods and services, leading to a positive output shock. However, since the economy is already operating at a level of potential output, the increase in demand would lead to higher prices due to a shortage of resources and capacity at higher levels of output. Therefore, both output and prices increase as a result of the positive aggregate demand shock.

If the Economy's AS Curve Is Upward Sloping,a Positive Aggregate