In the Keynesian model which includes the Keynesian short-run aggregate supply curve
A) an increase in aggregate demand would causes the price level to rise, but does not change the level of real GDP.
B) an increase in aggregate demand causes real GDP to rise without changing the price level.
C) an increase in aggregate demand changes neither the price level nor the level of real GDP.
D) an increase in aggregate demand causes real GDP and the price level to decrease.

Question

Quizplus · Accepted Answer

In the Keynesian model, an increase in aggregate demand would cause real GDP to rise without changing the price level in the short run due to the existence of idle resources and sticky nominal wages. This is depicted by the Keynesian short-run aggregate supply curve, which is horizontal until full employment is reached. Therefore, option B is the correct answer.

In the Keynesian Model Which Includes the Keynesian Short-Run Aggregate