If an economy has fully flexible prices, and demand unexpectedly increases, you would expect the economy’s real GDP to: A. Increase. B. Decrease. C. Remain the same. D. Equal nominal GDP<\/p>\n\n\n\n
The correct answer and explanation is:<\/mark><\/strong><\/p>\n\n\n\n The correct answer is C. Remain the same.<\/strong><\/p>\n\n\n\n In an economy with fully flexible prices, any increase in demand will lead to a corresponding increase in prices rather than a change in the quantity of goods and services produced, which is represented by the real GDP. This happens because, in the short run, producers adjust their prices to match the higher demand, but they do not immediately increase the supply of goods and services to meet this demand increase. The real GDP, which is adjusted for price changes, will remain unchanged.<\/p>\n\n\n\n When prices are fully flexible, they act as a signal to balance supply and demand. As demand increases, firms raise prices to take advantage of the higher demand. However, since prices are flexible, the increase in demand does not affect the total output of the economy in real terms. The output remains the same in terms of physical goods and services, but the nominal GDP would increase due to higher prices.<\/p>\n\n\n\n This scenario assumes that there are no other factors such as supply-side constraints, resource limitations, or time lags that would prevent the economy from adjusting quickly to changes in demand. Therefore, while nominal GDP increases due to price rises, the real GDP, which excludes price changes, stays constant because the economy’s production capacity does not change immediately in response to demand shifts.<\/p>\n\n\n\n In summary, in an economy with fully flexible prices, an unexpected increase in demand leads to higher prices without an immediate change in real GDP, as firms adjust their prices rather than their production levels.<\/p>\n","protected":false},"excerpt":{"rendered":" If an economy has fully flexible prices, and demand unexpectedly increases, you would expect the economy’s real GDP to: A. Increase. B. Decrease. C. Remain the same. D. Equal nominal GDP The correct answer and explanation is: The correct answer is C. Remain the same. In an economy with fully flexible prices, any increase in […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-246960","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/246960","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=246960"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/246960\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=246960"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=246960"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=246960"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}