Using a graph of the AD and long-run aggregate supply curves,the Internet revolution of the 1990s caused:
A) both real growth and inflation to increase.
B) both real growth and inflation to decrease.
C) real growth to increase and inflation to decrease.
D) real growth to decrease and inflation to increase.

Question

Quizplus · Accepted Answer

The Internet revolution of the 1990s caused an increase in long-term productivity, which shifted the long-run aggregate supply (LRAS) curve to the right. The increase in productivity also allowed for higher output without causing an increase in prices, thus shifting the aggregate demand (AD) curve to the right as well. This led to an increase in real growth and a decrease in inflation, as shown by the intersection of the new LRAS and AD curves at a higher level of output and lower price level. Therefore, the best choice is C.

Using a Graph of the AD and Long-Run Aggregate Supply