An increase in aggregate demand when the economy is operating at high levels of output is likely to result in
A) a large increase in both output and the overall price level.
B) an increase in the overall price level but little or no increase in output.
C) an increase in output but little or no increase in the overall price level.
D) little or no increase in either output or the overall price level.

Question

Quizplus · Accepted Answer

When the economy is operating at high levels of output, it is likely that there is not much slack in resources such as labor and capital. An increase in aggregate demand is likely to lead to higher prices instead of an increase in output, as firms cannot easily expand output without incurring higher costs. Therefore, the best choice is B, which indicates an increase in the overall price level but little or no increase in output.

An Increase in Aggregate Demand When the Economy Is Operating