Refer to the above figure. An increase in aggregate demand beyond real Gross Domestic Product (GDP) level Y1 would result in
A) higher real GDP but not a higher price level.
B) a lower price level but no change in real GDP.
C) a higher price level but no change in real GDP.
D) a lower price level and an increases in real GDP.

Question

Quizplus · Accepted Answer

When the aggregate demand increases beyond the real GDP level Y1, firms will increase their production to meet the demand, leading to an increase in the price level (inflation) but no change in real GDP as the economy is operating at its full capacity. Therefore, the correct choice is C, which shows a higher price level but no change in real GDP.

Refer to the Above Figure