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In the intermediate zone of the SRAS curve, which is upward-sloping between the flat Keynesian zone and the steep neoclassical zone, what happens to output and the price level when AD shifts to the right?
AOutput falls while the price level rises
BBoth output and the price level rise
COutput rises while the price level falls
DNeither output nor the price level changes
Answer & Solution
Correct answer: B. Both output and the price level rise
1. In the intermediate zone, the SRAS curve is upward-sloping rather than flat or vertical.
2. Along an upward-sloping curve, a rightward AD shift raises both the quantity where the curves intersect and the price level at that intersection.
3. Higher output here also means output moves closer to potential GDP, which lowers unemployment.
4. The higher price level at the new intersection is exactly what creates upward pressure on inflation.
_Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.6 | Keynes’ Law and Say’s Law in the AD/AS Model_
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