Consider the basic AD/AS model.Suppose firms are currently producing beyond their normal capacity.A change in AD leads to a relatively
A)large change in price level and a large change in real GDP.
B)large change in price level and a small change in real GDP.
C)small change in price level and a large change in real GDP.
D)small change in price level and a small change in real GDP.
E)no change in both price and output.

Question

Quizplus · Accepted Answer

When firms are producing beyond their normal capacity, the economy is already at or near full employment, meaning that any increase in AD will primarily lead to an increase in price level rather than real GDP. This is known as the "inflationary gap" and is characterized by a vertical short-run aggregate supply (SRAS) curve. Therefore, a change in AD will lead to a relatively large change in price level but only a small change in real GDP, as represented by choice B.

Consider the Basic AD/AS Model