An increase in aggregate demand with no adjustment in monetary policy will result in:
A) an increase in potential output and higher inflation.
B) a decrease in potential output and higher inflation.
C) no change in potential output but higher inflation.
D) no change in inflation.

Question

Quizplus · Accepted Answer

An increase in aggregate demand, without an adjustment in monetary policy, will lead to no change in potential output but higher inflation. This is because as demand for goods and services increases, businesses will increase their prices and wages, and this will result in higher inflation. However, no change will occur in potential output, which is the maximum sustainable level of output that an economy can produce in the long run.

An Increase in Aggregate Demand with No Adjustment in Monetary