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IAI Actuarial Core Principles · Business Economics · Business activity, unemployment and inflation

An economy is operating on the upward-sloping section of its short-run aggregate supply curve. A rise in consumer confidence shifts aggregate demand to the right. What is the most likely short-run outcome?

Real output and the price level both rise. With an upward-sloping short-run aggregate supply curve, a rightward shift in aggregate demand moves the economy to a higher equilibrium output and higher prices, because firms face rising costs as they expand production.

  1. AReal output rises and the price level risesCorrect
  2. BReal output rises and the price level falls
  3. CReal output falls and the price level rises
  4. DReal output is unchanged and the price level falls
  5. Real output rises and the price level is unchanged

Explanation

Moving along an upward-sloping SRAS curve to a higher AD means both output and the price level increase. Unchanged prices would require a horizontal SRAS, and falling prices with higher output would require an SRAS shift.

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