If the economy is in equilibrium at the $400 billion level of GDP and the full-employment level of GDP is $500 billion:
A)real and nominal GDP will both increase.
B)economy does not reach full-employment unless aggregate expenditures increases.
C)real GDP will increase, but nominal GDP will decrease.
D)the price level will increase.

Question

Quizplus · Accepted Answer

If the economy is in equilibrium at the $400 billion level of GDP, it means that aggregate expenditures are currently equal to $400 billion. However, the full-employment level of GDP is $500 billion, which means that the economy is not producing at its maximum potential. To reach full employment, aggregate expenditures must increase to stimulate more production and spending in the economy. Thus, real GDP may increase, but it is not guaranteed to reach $500 billion, and nominal GDP may or may not change depending on changes in the price level.

If the Economy Is in Equilibrium at the $400 Billion