Suppose an economy has an upward-sloping aggregate supply curve and a recessionary GDP gap equal to $50 billion.If aggregate demand increases by a total of $50 billion,
A)The recessionary GDP gap will be eliminated.
B)The resulting equilibrium GDP will be lower than full employment GDP because some of the additional spending will drive up prices instead of increasing output.
C)The resulting equilibrium GDP will be greater than full-employment GDP because of demand-pull inflation.
D)Cyclical unemployment will increase.

Question

Quizplus · Accepted Answer

An increase in aggregate demand by $50 billion will not fully eliminate the recessionary gap because some of the increase will lead to higher prices rather than a full increase in output, due to the upward-sloping aggregate supply curve.

Suppose an Economy Has an Upward-Sloping Aggregate Supply Curve and a Recessionary