Refer to the graph above. Suppose that the economy is at an initial equilibrium where the AD₁ and AS₁ curves intersect. Demand-pull inflation in the long run can best be illustrated as a shift of: A) AS₁ to AS₂, and back again to AS₁ B) AD₁ to AD₂, and back again to AD₁ C) AS₁ to AS₂, consequently making AD₁ shift to AD₂ D) AD₁ to AD₂, consequently making AS₁ shift to AS₂

Question

Quizplus · Accepted Answer

Demand-pull inflation occurs when there is an increase in aggregate demand (AD) beyond the economy's capacity to produce, resulting in upward pressure on prices. This can be illustrated by a shift of the AD curve from AD₁ to AD₂. In the long run, however, firms may increase production to meet the higher demand, causing the short-run aggregate supply (SRAS) curve to shift from AS₁ to AS₂. Therefore, the correct choice is D, as the shift in AD leads to a subsequent shift in SRAS.

Refer to the Graph Above