Exam-style question
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SRAS capacity case on aggregate demand and supply analysis: which option best explains why an AD increase may mostly raise prices near full employment?.
- A.Use economic terminology such as demand, supply, elasticity, market failure, welfare, efficiency or policy trade-off instead of general business language.
- B.A higher price level is the same as inflation.
- C.Short-run and long-run macroeconomic effects are identical.
- D.Give a definition of aggregate demand and aggregate supply only, without application, chain of analysis, evaluation or judgement.
Model answer
What a good answer should say
- Correct answer: the option that uses the steep section of SRAS to explain stronger inflationary pressure and limited real GDP gains near capacity.
Explanation
Why this works
This item separates AD/AS diagram interpretation from a list of AD determinants. The answer should use spare capacity, bottlenecks and the slope of SRAS to judge whether demand growth raises output, prices, or both.
Common mistake
No common mistake is linked to this question yet.