Let aggregate demand in an economy with a potential GDP of 10,000 be represented initially by AD = 8,400 + 2,000/P. Suppose that over the course of one year, potential GDP rose to 10,500 and aggregate demand shifted to AD = 9,000 + 2,000/P. You should expect to have witnessed, over the course of that year,

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Quizplus · Accepted Answer

The increase in aggregate demand from 8,400 to 9,000, alongside an increase in potential GDP from 10,000 to 10,500, indicates an economy experiencing growth. The shift in aggregate demand without a proportional increase in potential GDP suggests that demand is outpacing supply, leading to price inflation. The specific percentage of inflation cannot be directly calculated from the given information without additional data on price levels or the aggregate supply response, but the scenario described typically results in price inflation, not disinflation.

Let Aggregate Demand in an Economy with a Potential GDP