What is the result of an increase in aggregate demand that occurs along the short-run aggregate supply curve where the price level does not rise?

Question

Multiple choice question.

Real output rises by the full extent of the multiplier.

Real output decreases by the full extent of the multiplier.

Real output rises, but without the multiplier.

Real output decreases, but without the multiplier.

Answer 1

The correct answer is:

Real output rises by the full extent of the multiplier.

When there is an increase in aggregate demand along the short-run aggregate supply curve without a rise in the price level, it indicates that the economy is responding to the increase in demand by increasing real output, likely utilizing idle resources. The multiplier effect further amplifies this increase in output by encouraging additional rounds of spending and production.