Suppose the economy is operating at full employment. A permanent rightward shift in the AD curve will cause inflationary pressures that will

Question

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When an economy is operating at full employment, any increase in aggregate demand (AD) will cause prices to rise without any increase in output (Y). This is because the economy is already using all its resources to produce output at its full capacity (Y*). Therefore, any permanent rightward shift in the AD curve will cause inflationary pressures. However, these pressures will eventually subside unless accompanied by expansionary monetary policy, which would lead to a further increase in AD and inflation.

Suppose the Economy Is Operating at Full Employment