-Which of the following statements best describes the effect of an increase in aggregate demand?
A)The change in equilibrium real output exceeds the change in government purchases times the spending multiplier because of a fall in the equilibrium price level.
B)The change in equilibrium real output is less than the change in government purchases times the spending multiplier because of a rise in the equilibrium price level.
C)The change in equilibrium real output is less than the change in government purchases times the spending multiplier because of a fall in the equilibrium price level.
D)The change in equilibrium real output exceeds the change in government purchases times the spending multiplier because of a rise in the equilibrium price level.
E)The change in equilibrium real output is the same as the change in government purchases times the spending multiplier.

Question

-Which of the following statements best describes the effect of an increase in aggregate demand?
A)The change in equilibrium real output exceeds the change in government purchases times the spending multiplier because of a fall in the equilibrium price level. 
B)The change in equilibrium real output is less than the change in government purchases times the spending multiplier because of a rise in the equilibrium price level. 
C)The change in equilibrium real output is less than the change in government purchases times the spending multiplier because of a fall in the equilibrium price level. 
D)The change in equilibrium real output exceeds the change in government purchases times the spending multiplier because of a rise in the equilibrium price level. 
E)The change in equilibrium real output is the same as the change in government purchases times the spending multiplier.

Quizplus · Accepted Answer

An increase in aggregate demand typically leads to a rise in the equilibrium price level. This rise in price level can dampen the initial increase in real output by making goods and services more expensive, thereby reducing the quantity of goods and services demanded. This effect means that the actual change in equilibrium real output might be less than what would be predicted by the spending multiplier applied to the initial increase in government purchases or any other component of aggregate demand.

-Which of the Following Statements Best Describes the Effect of an Increase