If aggregate demand increases and aggregate supply decreases, what is the most likely effect on the price level?

• A. The price level will fall.
• B. The price level will rise.
• C. The price level will fluctuate unpredictably.
• D. The price level will remain unchanged.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the components involved. Aggregate demand (AD) represents the total demand for goods and services in an economy at different price levels, while aggregate supply (AS) represents the total output producers are willing to supply at different price levels.
2. Step 2: Analyze the effect of an increase in aggregate demand. When AD increases, it means consumers and businesses want to buy more goods and services at every price level, which tends to push the price level upward due to higher demand.
3. Step 3: Analyze the effect of a decrease in aggregate supply. A decrease in AS means producers supply less output at every price level, often due to higher production costs or supply shocks, which also tends to increase the price level because goods become scarcer.
4. Step 4: Combine the effects. Since both an increase in AD and a decrease in AS individually put upward pressure on the price level, their combined effect will most likely cause the price level to rise.
5. Step 5: Conclude the most likely outcome. Given these simultaneous shifts, the price level will rise rather than fall, fluctuate unpredictably, or remain unchanged.