Figure 8-1
-According to Figure 8-1,an increase in aggregate demand beyond real GDP level Q₁ will result in
A)higher unemployment and excess productive capacity.
B)higher output,but not higher prices.
C)higher prices,but no change in output.
D)falling prices and increases in output.

Question

Figure 8-1 
-According to Figure 8-1,an increase in aggregate demand beyond real GDP level Q₁ will result in
A)higher unemployment and excess productive capacity. 
B)higher output,but not higher prices. 
C)higher prices,but no change in output. 
D)falling prices and increases in output.

Quizplus · Accepted Answer

According to the figure, the economy is already producing at potential GDP(Q1) and any increase in aggregate demand beyond this level will result in a rise in the price level without any further increase in output. This is because the economy has already utilized all its productive resources and any increase in demand will only lead to higher prices due to demand-pull inflation. Therefore, the correct answer is C, higher prices, but no change in output.

Figure 8-1 -According to Figure 8-1,an Increase in Aggregate Demand Beyond Real