If factor prices remain constant, an increase in aggregate demand
A)increases the price level, and leaves real GDP unchanged.
B)decreases the price level and decreases real GDP.
C)increases the price level and increases real GDP.
D)decreases the price level and increases real GDP.
E)increases the price level and decreases real GDP.

Question

Quizplus · Accepted Answer

If factor prices remain constant and there is an increase in aggregate demand, firms will increase production to meet the demand. This will lead to an increase in both the price level and real GDP. This is because the increase in output will lead to an increase in income and spending, which further stimulates production and demand. Therefore, the best choice is C, which states that an increase in aggregate demand increases the price level and increases real GDP.

If Factor Prices Remain Constant, an Increase in Aggregate Demand