Suppose that the economy is at full employment and aggregate demand increases by more than it is anticipated to increase. Other things remaining the same, ___________.
A) real GDP remains at potential GDP
B) real GDP decreases below potential GDP
C) long-run aggregate supply decreases
D) real GDP increases above potential GDP

Question

Quizplus · Accepted Answer

If aggregate demand increases more than anticipated, firms will increase output to meet the higher demand. However, since the economy is at full employment, firms cannot employ more workers to increase output, which means they will have to produce more using their existing resources. This will lead to an increase in the price level, which shifts the short-run aggregate supply upward, leading to an increase in real GDP above potential GDP in the short run.

Suppose That the Economy Is at Full Employment and Aggregate