One way inflation reduces aggregate demand is by:
A) increasing nominal GDP.
B) increasing velocity.
C) reducing real balances.
D) increasing wealth.

Question

Quizplus · Accepted Answer

Inflation reduces real balances, which means that the purchasing power of individuals' money decreases. Therefore, they are unable to purchase as much as they would have in a situation of no inflation. This decrease in real balances leads to a decrease in aggregate demand. Option A is incorrect because inflation doesn't increase real GDP. Option B is incorrect because an increase in velocity might actually increase aggregate demand. Option D is incorrect because although inflation might increase the nominal value of assets, it might not increase real wealth due to the decrease in purchasing power.

One Way Inflation Reduces Aggregate Demand Is By