Given aggregate demand, a decrease in aggregate supply creates:
A) a higher price level and a higher GDP level.
B) a lower price level and a higher GDP level.
C) cost-push inflation.
D) demand-pull inflation.

Question

Quizplus · Accepted Answer

A decrease in aggregate supply leads to a decrease in real GDP and an increase in the price level, known as cost-push inflation. Choice A and B are incorrect because a decrease in aggregate supply results in a lower GDP level. Choice D is incorrect because demand-pull inflation is caused by an increase in aggregate demand, not a decrease in aggregate supply.

Given Aggregate Demand, a Decrease in Aggregate Supply Creates