Exhibit 14-7 Aggregate supply and demand curves At point A in Exhibit 14-7, the aggregate demand AD₂ and the aggregate supply curve reflect an economy in which A) full employment is at $1,000 billion GDP. B) excess aggregate supply is created when there is a shift from AD₁ to AD₂. C) excess aggregate demand forces prices up to P = 120. D) excess aggregate demand causes prices to stabilize at P = 110.

Question

Quizplus · Accepted Answer

At point A, the aggregate demand curve intersects the aggregate supply curve at a level of output where the economy is experiencing excess aggregate demand. This excess demand leads to an increase in prices, causing them to stabilize at P = 120. Therefore, choice C is the correct answer. Choices A, B, and D are not correct as they do not reflect the situation at point A.

Exhibit 14-7 Aggregate Supply and Demand Curves