In the basic model with AD and LRAS only,a shock to aggregate demand has an effect on the inflation rate but no effect on the real growth rate.

Question

Quizplus · Accepted Answer

In the basic model with AD and LRAS only, an increase in aggregate demand will lead to an increase in the price level (inflation) but will not affect the long-run potential output and thus will have no effect on the real growth rate. Similarly, a decrease in aggregate demand will lead to a decrease in the price level (deflation) but no effect on the real growth rate. Therefore, a shock to aggregate demand has an effect on the inflation rate but not on the real growth rate.

In the Basic Model with AD and LRAS Only,a Shock