In modern Keynesian analysis, what is the result of an increase in aggregate demand?

In modern Keynesian analysis, an increase in aggregate demand typically leads to an increase in both the price level and output. This is grounded in the Keynesian principle that when aggregate demand rises, businesses respond by increasing production to meet the higher demand for goods and services.

As businesses ramp up output, they often face increased costs, which can lead to inflationary pressures in the economy. When demand grows substantially, suppliers may not be able to immediately increase capacity, leading to higher prices as well as greater levels of output produced. Therefore, the correct understanding aligns with the view that in the short run, both output and price levels rise due to the increased aggregate demand.

This scenario illustrates the interaction between supply and demand in the economy where heightened demand prompts producers to not only increase their output but also adjust prices accordingly, reflecting the higher demand conditions in the market.