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

Question

Quizplus · Accepted Answer

When demand-pull inflation occurs at potential GDP, the economy overheats, leading to higher prices and costs, which can cause the AS curve to shift leftward as firms face higher production costs.

If Demand Pull Inflation Occurs When the Economy Is Already