A policy to increase aggregate demand to cure a contractionary gap may succeed; however, inflation is a likely result.

Question

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When a policy is implemented to increase aggregate demand, it can lead to an increase in prices since demand exceeds supply. This situation is commonly referred to as demand-pull inflation. Therefore, it is likely that inflation will result from implementing a policy to cure a contractionary gap.

A Policy to Increase Aggregate Demand to Cure a Contractionary