An increase in the aggregate demand for goods and services will result in an increase in the amount of output firms are willing to produce, and this increase in output will be accompanied by:
A) a decrease in the inflation rate.
B) an increase in the inflation rate.
C) a decrease in nominal GDP.
D) an increase in potential GDP.

Question

Quizplus · Accepted Answer

An increase in aggregate demand will lead to higher output and higher prices. This is because firms will respond to the increased demand by increasing their prices, which will cause inflation to increase. Therefore, an increase in the aggregate demand for goods and services will result in an increase in the inflation rate. The other options are incorrect as they do not align with what is expected to happen when there is an increase in aggregate demand.

An Increase in the Aggregate Demand for Goods and Services