According to the aggregate supply and aggregate demand model, inflation is caused when the short-run aggregate supply _____ or the aggregate demand:
A) decreases; decreases.
B) decreases; increases.
C) increases; decreases.
D) increases; increases.

Question

Quizplus · Accepted Answer

Inflation occurs when the aggregate demand for goods and services in an economy increases or when the short-run aggregate supply decreases. Both scenarios lead to higher prices for goods and services, which is the definition of inflation. An increase in aggregate demand puts upward pressure on prices as consumers are willing to pay more. A decrease in short-run aggregate supply means there are fewer goods and services available, which can also drive up prices due to scarcity.

According to the Aggregate Supply and Aggregate Demand Model, Inflation