In the short run in periods of low inflation, an increase in aggregate demand from a position of full employment leads to:
A) higher prices and higher unemployment.
B) higher prices and higher output.
C) lower prices and higher output.
D) lower prices and higher unemployment.

Question

Quizplus · Accepted Answer

In periods of low inflation, an increase in aggregate demand from a position of full employment leads to higher prices and higher output in the short run. This is because firms are already operating at full capacity and cannot increase output easily, so they increase prices instead. This increase in prices creates an incentive to produce more, which raises output. However, in the long run, prices will continue to rise, and the economy will eventually return to full employment at a higher price level.

In the Short Run in Periods of Low Inflation, an Increase