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) aggregate supply did not change.
B) potential GDP increased, but at a slower rate than aggregate demand.
C) there was a movement up along the aggregate demand curve in 2008.
D) potential GDP decreased.

Question

Quizplus · Accepted Answer

The increase in aggregate demand suggests that people were willing to spend more money and that the economy was growing. However, if potential GDP did not keep up with aggregate demand, then there would be upward pressure on prices, leading to inflation. Therefore, option B is the best explanation for the inflation seen in India in 2008.

Aggregate Demand in India Increased in 2008