ECONOMICS (CBSE/UGC NET)

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ECONOMICS

AGGREGATE DEMAND

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of ____ in aggregate ____ is a rise in both inflation and output in the short-run, but in the long-run the only effect is a rise in inflation.
A
a decrease; supply
B
an increase; demand
C
an increase; supply
D
a decrease; demand
Explanation: 

Detailed explanation-1: -Higher aggregate demand and aggregate supply raise GDP, hence lowering unemployment. As a result, the employment level increases.

Detailed explanation-2: -In a boom, output rises above its potential level, resulting in a positive gap. In this case, the economy is often described as “overheating, ” which generates upward pressure on inflation and may prompt the central bank to “cool” the economy by raising interest rates.

Detailed explanation-3: -Answer and Explanation: If there is an increase in aggregate demand when the economy is at full employment will likely result in inflation.

Detailed explanation-4: -How much an economy is able to produce ultimately depends on that country’s resources. In the lesson on short-run aggregate supply, we learned that producers respond to changes in the price level in the short-run, which is why we have the SRAS curve.

There is 1 question to complete.
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