In the upward-sloping segment of the aggregate supply curve,
A) when GDP increases, the price level rises.
B) when GDP increases, the price level does not change.
C) when GDP decreases, the price level rises.
D) when GDP increases, the price level falls.
E) there is no relationship between changes in GDP and changes in the price level.

Question

Quizplus · Accepted Answer

In the upward-sloping segment of the aggregate supply curve, also known as the short-run aggregate supply curve, when GDP increases, the price level rises because firms are operating at their maximum capacity and have less incentive to lower prices in the short run. Therefore, an increase in demand (higher GDP) leads to higher prices due to limited supply in the short run.

In the Upward-Sloping Segment of the Aggregate Supply Curve