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

Question

Quizplus · Accepted Answer

When the economy is operating below capacity, an increase in aggregate demand will result in a bigger change in output (or real GDP), as there are unused resources that can be utilized to increase production. However, as there is still excess capacity, the change in price level will be relatively small, as firms can increase production without having to raise prices.

If the Economy Is Operating Way Below Capacity, an Increase