Given that the economy is operating in the horizontal section of the aggregate supply curve in the simple Keynesian model,an increase in autonomous spending will ____________________,assuming that the economy remains in the horizontal section of the aggregate supply curve.
A) increase Real GDP and raise the price level
B) decrease Real GDP and raise the price level
C) increase Real GDP and leave the price level unchanged
D) increase Real GDP and lower the price level

Question

Quizplus · Accepted Answer

In the horizontal section of the aggregate supply curve, Real GDP is determined solely by aggregate demand. An increase in autonomous spending will shift the aggregate demand curve to the right, resulting in an increase in Real GDP. However, since the economy is in the horizontal section of the aggregate supply curve, the increase in production will not lead to higher prices as there is still excess capacity in the economy. Therefore, a increase in autonomous spending in this scenario will increase Real GDP but leave the price level unchanged.

Given That the Economy Is Operating in the Horizontal Section