What is true when the aggregate demand curve intersects the horizontal portion of the LRAS curve? A. There is excess capacity for production. B. There will be both an increase in real output and the average price level. C. The factors of production are fully utilized. D. Increases in aggregate demand will have no effect on real output.

When the aggregate demand curve intersects the horizontal portion of the LRAS curve, it indicates that the economy is operating with excess capacity for production. This means that resources are not fully employed, and businesses have the ability to increase output without causing upward pressure on prices. Hence, the correct answer is A. Additionally, in this scenario, any increase in aggregate demand will not lead to higher real output; instead, it will only result in higher average prices, as the economy can only produce at its current capacity. As such, D is also a key point to remember!