What will an increase in aggregate demand produce if aggregate supply is completely inelastic ?
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Answer: A. increase price but not output
Explanation
When aggregate supply is completely inelastic, total output cannot expand beyond capacity. An increase in aggregate demand therefore drives up the overall price level exclusively. Vertical aggregate supply curves mean nominal spending increases manifest entirely as inflation. Inelastic aggregate supply reflects a situation where the economy operates at full employment. The classical model assumes vertical aggregate supply in the long run. Price level changes occur rapidly when aggregate demand shifts against fixed productive capacity.
Macroeconomic stabilization policies must distinguish between demand-driven output growth and inflation. Stimulus spending during full employment typically generates inflationary pressures without boosting output. Understanding supply elasticity helps governments forecast the impacts of fiscal interventions. Option B describes an outcome typical of horizontal short-run aggregate supply curves. Option C describes the standard intermediate range where both price and output increase. Option D describes the opposite effect of a decrease in aggregate demand.
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