Without a change in target inflation, anything that shifts the aggregate demand curve to the right will cause:
A) a temporary increase in output.
B) a permanent reduction in inflation.
C) a temporary decrease in inflation.
D) an increase in output in the long run.

Question

Quizplus · Accepted Answer

An increase in aggregate demand will lead to a temporary increase in output because firms will respond by producing more in response to the higher demand. However, in the long run, output will return to the potential level and inflation will go up if the target inflation rate remains the same. Therefore, there will not be a permanent reduction in inflation (choice B) or a temporary decrease in inflation (choice C) as suggested in the other answer choices. Choice D is also incorrect because an increase in output will only be temporary, not permanent, as explained earlier.

Without a Change in Target Inflation, Anything That Shifts the Aggregate