Inflation reduces aggregate demand mainly by:
A)Increasing nominal GDP
B)Increasing velocity
C)Reducing real balances
D)Increasing wealth

Question

Quizplus · Accepted Answer

Inflation reduces the purchasing power of money, meaning that the real value of money decreases. As a result, people's real balances (the amount of money they have adjusted for inflation) decrease, which in turn reduces their ability to spend. This reduction in spending power decreases aggregate demand.

Inflation Reduces Aggregate Demand Mainly By