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

If aggregate demand increases and there is no adjustment in monetary policy, there will be no change in potential output in the short run, but there will be higher inflation. This is because there is a temporary mismatch between demand and supply, which drives up prices. In the long run, potential output may also increase as firms respond to the increased demand by increasing production and investment. However, this is not immediate and depends on various factors such as availability of resources, technology, and government policies.

An Increase in Aggregate Demand with No Adjustment in Monetary