Multiple Choice
Which of the following is a main goal of economic policy within a free-enterprise system?
77
views
1. Introduction to Macroeconomics
Introduction to Economics
Multiple Choice
Which of the following would cause both prices and real GDP to rise in the short run?
A
An increase in aggregate demand
B
A decrease in aggregate supply
C
An increase in aggregate supply
D
A decrease in aggregate demand
Verified step by step guidance1
Step 1: Understand the relationship between aggregate demand (AD), aggregate supply (AS), price level, and real GDP in the short run. Aggregate demand represents the total demand for goods and services in an economy, while aggregate supply represents the total output firms are willing to produce at different price levels.
Step 2: Recall that an increase in aggregate demand shifts the AD curve to the right. This means at every price level, the quantity of goods and services demanded increases.
Step 3: Analyze the effects of a rightward shift in aggregate demand on the short-run aggregate supply curve. In the short run, prices are somewhat flexible, so an increase in AD typically leads to higher price levels and higher real GDP.
Step 4: Contrast this with changes in aggregate supply: a decrease in AS shifts the AS curve left, causing prices to rise but real GDP to fall; an increase in AS shifts AS right, causing prices to fall and real GDP to rise; a decrease in AD shifts AD left, causing both prices and real GDP to fall.
Step 5: Conclude that only an increase in aggregate demand causes both prices and real GDP to rise in the short run, because it increases overall demand leading to higher output and higher prices.
Related Videos
Related Practice
