Based on the Keynesian theory of the business cycle, if the economy is at its full -employment equilibrium and aggregate demand increases then
A) the price level rises but real GDP remains unchanged.
B) the price level and GDP both decrease.
C) the price level and real GDP both increase.
D) real GDP decreases and the price level remains unchanged.

Question

Quizplus · Accepted Answer

According to the Keynesian theory of the business cycle, if the economy is at full employment equilibrium and aggregate demand increases, it will cause an increase in both price level and real GDP. This is because, in the short run, firms will increase production to meet the higher demand, leading to an increase in output and income (real GDP). However, due to the limited supply of resources (especially labor), the increase in demand will also lead to an increase in prices.

Based on the Keynesian Theory of the Business Cycle, If