According to the extended AD-AS model, what happens when aggregate demand increases in the short run?

Question

Multiple choice question.

Real output expands resulting in a positive GDP gap.

Real output contracts resulting in a negative GDP gap.

The full employment level reaches equilibrium.

Prices fall resulting in a decline in nominal wages.

Answer 1

In the context of the extended AD-AS (Aggregate Demand-Aggregate Supply) model, when aggregate demand increases in the short run, the correct answer is:

Real output expands resulting in a positive GDP gap.

This reflects that an increase in aggregate demand typically leads to higher production and employment in the short run, as the economy moves beyond its full employment level, creating a positive GDP gap.