If the economy is operating way below capacity, an increase in aggregate demand causes a ________ change in the price level and ________ change in output.
A) big; big
B) big; small
C) small; big
D) small; small

Question

Quizplus · Accepted Answer

If the economy is operating below capacity, there is spare capacity and resources are available. An increase in aggregate demand will put these resources to use, causing an increase in output. However, since there is still spare capacity, the increase in demand will not lead to a big increase in prices. Hence, there will be a small increase in the price level and a big increase in output.

If the Economy Is Operating Way Below Capacity, an Increase