With demand-pull inﬂation in the extended AD-AS model, there is
A) a decrease in aggregate demand and a decrease in unemployment that eventually increases nominal wages.
B) an increase in aggregate demand and a decrease in unemployment that eventually decreases nominal wages.
C) an increase in aggregate demand and an increase in unemployment that eventually decreases nominal wages.
D) an increase in aggregate demand and a decrease in unemployment that eventually increases nominal wages.

Question

Quizplus · Accepted Answer

Demand-pull inflation occurs when aggregate demand increases faster than the economy's productive capacity, leading to an increase in prices. In the extended AD-AS model, an increase in aggregate demand shifts the AD curve to the right, leading to an increase in both output and prices. This leads to a decrease in unemployment as firms increase production to meet the higher demand. Eventually, firms may face labor shortages as unemployment falls, leading to an increase in nominal wages. Therefore, the correct choice is D, an increase in aggregate demand and a decrease in unemployment that eventually increases nominal wages.

With Demand-Pull Inﬂation in the Extended AD-AS Model, There Is