With demand-pull inflation in the extended AD-AS model, there is:
A) A decrease in aggregate demand and a decrease in unemployment that eventually increases nominal wages
B) An increase in aggregate demand and a decrease in unemployment that eventually decreases nominal wages
C) An increase in aggregate demand and an increase in unemployment that eventually decreases nominal wages
D) An increase in aggregate demand and a decrease in unemployment that eventually increases nominal wages

Question

Quizplus · Accepted Answer

With demand-pull inflation, there is an increase in aggregate demand due to increased consumer spending, investment, or government spending. This initial increase in aggregate demand leads to an increase in output and employment, which reduces unemployment. As the labor market tightens and the pool of available workers shrinks, employers raise nominal wages to attract and retain workers. This increase in nominal wages pushes up firms' production costs, leading to a decrease in aggregate supply. However, at the initial stage, the increase in aggregate demand and decrease in unemployment eventually lead to an increase in nominal wages. Therefore, option D is correct.

With Demand-Pull Inflation in the Extended AD-AS Model, There Is