Answer to Question #89467 in Macroeconomics for Sofia Bale

Question

Explain the combined effect of an increase aggregate demand and decrease short run aggregate supply on a country's real GDP and the price level, starting from a position of a long-run(full-employment) equilibrium

Answer 1

The price level increases. The country's real GDP can either increase or decrease, it depends on the extent of the aggregate demand growth and short run aggregate supply falling. If short run aggregate supply decreases in a greater extent than aggregate demand rises, this factor will dominate and country's real GDP will diminish, and vice versa.