When the quantity of real GDP demanded exceeds the quantity of real GDP supplied, firms
A) increase production and prices.
B) decrease production and prices.
C) increase production and lower prices.
D) do not change production because aggregate demand and potential GDP will adjust.
E) decrease production and increase prices.

Question

Quizplus · Accepted Answer

When the quantity of real GDP demanded exceeds the quantity of real GDP supplied, it indicates that there is more demand than supply in the economy. Firms respond to this situation by increasing production to meet the higher demand and raising prices due to the increased demand for their products, leading to inflationary pressures. This is a basic principle of supply and demand in economics.

When the Quantity of Real GDP Demanded Exceeds the Quantity