Question

When the economy is in a severe recession, an increase in aggregate demand will lead to __________.

A. an increase in the long-run equilibrium level of output.B. a decrease in the long-run equilibrium level of output.C. a big increase in the price level and a smaller increase in real GDP.D. a big increase in real GDP and a smaller increase in the price level.E. A and D

Answer 1

The correct answer is letter "A": an increase in the long-run equilibrium level of output.

Step-by-step explanation:

Aggregate Demand is a macroeconomic term describing the total demand in an economy for all goods and services at any given price level in a given period. That scenario implies aggregate demand is the demand for the Gross Domestic Product (GDP) of a country.

In front of a recession, the government should promote the increase the aggregate demand by lowering rates so more loans will be available and reachable. With more loans, more investments come and in the long term, the output is likely to hit its equilibrium point.