Question

Aggregate supply (GDP) can move up or down smoothly in the short run because:

Options

• Unused resources are available

• Investment is autonomous and constant

• The price level adjusts continuously to clear markets

• The marginal propensity to consume equals one

Answer 1

With the price level fixed, aggregate supply (GDP) can move up or down smoothly because unused resources are available. This allows output to expand or contract without price changes, so whatever the level of GDP, the same amount is supplied.