Aggregate demand in India increased in 2008. In addition, real GDP grew strongly and inflation approached 10 percent. The best explanation for this inflation is that
A) potential GDP increased, but at a slower rate than aggregate demand.
B) potential GDP decreased.
C) there was a movement up along the aggregate demand curve in 2008.
D) aggregate supply did not change.

Question

Quizplus · Accepted Answer

When aggregate demand increases faster than potential GDP, it can lead to inflation as the economy overheats, with demand outpacing supply.

Aggregate Demand in India Increased in 2008