Economic growth will be associated with a constant price level when
A) the increase in aggregate demand exactly equals the increase in long-run aggregate supply.
B) the increase in aggregate demand is more than the increase in long-run aggregate supply.
C) the increase in aggregate demand is less than the increase in long-run aggregate supply.
D) the increase in aggregate demand is accompanied by a reduction in short-run aggregate supply.

Question

Quizplus · Accepted Answer

When the increase in aggregate demand exactly equals the increase in long-run aggregate supply, there is no excess demand or supply in the economy, and prices will stay constant. This is known as the long-run equilibrium level of GDP. If either aggregate demand or supply increases by more than the other, there will be either inflationary or deflationary pressure on prices, leading to a change in the overall price level. The reduction of short-run aggregate supply (option D) would also result in higher prices and inflation.

Economic Growth Will Be Associated with a Constant Price Level