Suppose the nation is in a recession.As a result,the current macroeconomic equilibrium occurs along the flat portion of the aggregate supply curve.A moderate increase in aggregate demand is likely to

Question

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Since the current macroeconomic equilibrium occurs along the flat portion of the aggregate supply curve, an increase in aggregate demand will result in an increase in equilibrium real GDP, but will have little effect on the price level. This is because output can increase without leading to significant upward pressure on prices, given the excess capacity and unemployment of resources that typically characterize a recessionary period. Option A is incorrect because a moderate increase in aggregate demand is not likely to increase the price level significantly, given the ample slack in the economy. Option C is incorrect because a moderate increase in aggregate demand is not likely to cause the price level to fall, unless there were deflationary pressures already in place. Option D is incorrect because there is no reason to expect a decrease in employment if aggregate demand were to increase moderately, as this would lead to a higher level of output and income, which could boost job creation in the short run.

Suppose the Nation Is in a Recession