When the price level declines while real GDP rises, what is the likely cause?

When the price level declines while real GDP rises, the most likely cause is an increase in short-run aggregate supply. An increase in short-run aggregate supply implies that producers are able to offer more goods and services at all price levels due to factors such as enhanced productivity, reduced costs, or improvements in technology. This shift results in a rightward movement of the short-run aggregate supply curve.

As the short-run aggregate supply curve shifts to the right, the economy can produce a higher level of output (real GDP) without the price level rising. In essence, this allows the economy to grow while also leading to a decrease in the overall price level, which typically happens when supply outpaces demand at existing prices. This scenario illustrates how changes in aggregate supply can lead to opposite movements in price levels and output.

The other options would not typically produce a scenario where price levels decline alongside rising real GDP. For instance, if aggregate demand decreases, it generally leads to lower GDP and potentially lower prices, but not the increase in GDP noted in the question. Conversely, if aggregate demand increases, it would usually push both price levels and GDP higher, not lower prices while increasing output. A decrease in short-run aggregate supply would lead to higher prices and lower output, which