If demand pull inflation occurs when the economy is already at potential GDP,then following the initial increase in aggregate demand,the
A)AS curve shifts rightward.
B)potential GDP line shifts rightward.
C)AS curve shifts leftward.
D)potential GDP line shifts leftward.
E)None of the above is correct because demand-pull inflation shifts only the aggregate demand curve.

Question

Quizplus · Accepted Answer

When demand pull inflation occurs and the economy is already at potential GDP, any increase in aggregate demand will lead to increased demand for goods and services beyond the ability of the economy to produce. This will create upward pressure on prices and result in inflation. In this situation, the AS curve shifts leftward, as the economy cannot produce more beyond its potential GDP, leading to a decrease in output and an increase in prices. The potential GDP line does not shift, as it represents the maximum level of output the economy can sustain in the long-run.

If Demand Pull Inflation Occurs When the Economy Is Already