Suppose aggregate demand increases by less than expected. Which of the following describes what will occur?
A) Real GDP will be more than potential GDP.
B) Real GDP will be less than potential GDP.
C) The price level will fall.
D) Both answers A and B are correct.

Question

Quizplus · Accepted Answer

If aggregate demand increases by less than expected, it means that there is not enough demand to meet the potential output of the economy. As a result, firms will cut back on production, leading to a decrease in real GDP. Potential GDP refers to the maximum output that an economy can produce without causing inflation, so if real GDP falls below this level, it indicates that the economy is underutilizing its resources. The price level may or may not fall depending on the specific circumstances, but it is not directly related to the decrease in aggregate demand. Therefore, answer B is the most accurate.

Suppose Aggregate Demand Increases by Less Than Expected