If demand pull inflation occurs when the economy is already at potential GDP, then following the initial increase in aggregate demand, the
A)AS curve shifts rightward.
B)potential GDP line shifts rightward.
C)AS curve shifts leftward.
D)potential GDP line shifts leftward.
E)None of the above are correct because demand-pull inflation shifts only the aggregate demand curve.

Question

Quizplus · Accepted Answer

Demand-pull inflation occurs when aggregate demand exceeds potential GDP, resulting in a shortage of goods and services. When demand pull inflation occurs when the economy is already at potential GDP, it means that the economy is already producing the maximum output it can. Therefore, increasing aggregate demand further will cause a rise in prices rather than output. As a result, the aggregate supply curve shifts leftward, indicating a decrease in output and an increase in the price level. Therefore, option C is the correct answer.

If Demand Pull Inflation Occurs When the Economy Is Already