Refer to the above graph.Given that the economy is at an initial equilibrium where the AD₁ and AS₁ curves intersect, demand-pull inflation in the short run can best be represented by a shift from: A)AS₁ to AS₃. B)AD₁ to AD₂. C)AS₁ to AS₂. D)AD₂ to AD₁.

Question

Quizplus · Accepted Answer

Demand-pull inflation is caused by an increase in aggregate demand relative to aggregate supply. In the short run, this is represented by a rightward shift of the aggregate demand curve. Thus, the initial equilibrium point of AD₁ will shift to the right to AD₂, which represents the new equilibrium with higher price and output levels. The other choices are incorrect because they either represent a shift in the opposite direction or a shift in the long-run aggregate supply curve, which is not related to demand-pull inflation in the short run.

Refer to the Above Graph