Suppose firms are currently producing beyond their normal capacity. A change in AD leads to a relatively
A)large change in price level and a small change in real GDP.
B)large change in price level and a large change in real GDP.
C)no change in both price and output.
D)small change in price level and a large change in real GDP.
E)small change in price level and a small change in real GDP.

Question

Quizplus · Accepted Answer

When firms are producing beyond their normal capacity, they are operating in the inelastic portion of the aggregate supply curve. Therefore, an increase in aggregate demand (AD) will lead to a large increase in the price level but only a small increase in real GDP, as firms cannot significantly increase output beyond their capacity.

Suppose Firms Are Currently Producing Beyond Their Normal Capacity