When an increase in aggregate demand exceeds the increase in aggregate supply,
A) real GDP decreases while nominal GDP increases.
B) the economy will experience inflation as the price level rises.
C) the price level falls while real GDP increases.
D) nominal GDP decreases and real GDP decreases.

Question

Quizplus · Accepted Answer

When aggregate demand exceeds aggregate supply, it creates excess demand in the economy which leads to upward pressure on prices. This results in inflation as the price level rises. Option A is incorrect because if real GDP decreases, then in most cases, nominal GDP will also decrease. Option C is incorrect because if the price level falls, it indicates a decrease in aggregate demand which would lower real GDP in most cases. Option D is incorrect because if both nominal and real GDP decrease, it indicates a decrease in both aggregate demand and supply, which is not consistent with the scenario given in the question.

When an Increase in Aggregate Demand Exceeds the Increase in Aggregate