In the short run, an increase in aggregate demand
A) lowers the price level and increases real GDP.
B) raises the price level and increases real GDP.
C) raises the price level and decreases real GDP.
D) lowers the price level and decreases real GDP.

Question

Quizplus · Accepted Answer

An increase in aggregate demand leads to an increase in both output and prices in the short run. This is due to the fact that with limited supply, higher demand results in higher prices. As output expands to meet the increased demand, real GDP also rises. Therefore, B is the correct answer.

In the Short Run, an Increase in Aggregate Demand