If demand pull inflation occurs when the economy is already at potential GDP, then following the initial increase in aggregate demand, the
A) LAS curve shifts rightward.
B) SAS curve shifts rightward.
C) SAS curve shifts leftward.
D) LAS curve shifts leftward.

Question

Quizplus · Accepted Answer

If demand pull inflation occurs when the economy is already at potential GDP, it means that the economy is already producing at its maximum capacity. Therefore, any increase in aggregate demand will only lead to higher prices as producers cannot increase their output anymore. This will cause the SAS curve to shift leftward, as the cost of production increases and the quantity supplied decreases.

If Demand Pull Inflation Occurs When the Economy Is Already