If the economy is operating on the relatively vertical segment of the aggregate supply curve, an increase in aggregate demand causes a ________ change in the price level and a ________ change in output.
A) small; small
B) big; big
C) big; small
D) small; big

Question

Quizplus · Accepted Answer

If the economy is operating on the relatively vertical segment of the aggregate supply curve, it means that the economy is already producing at its potential output. Any increase in aggregate demand would push the price level up significantly while only causing a small increase in output due to limited ability to increase production capacity in the short run. This is known as the "cost-push" inflationary effect. Therefore, a big change in the price level and a small change in output is expected.

If the Economy Is Operating on the Relatively Vertical Segment