Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a multiperiod positive demand shock occurs, the DAS shifts upward because:
A) the central bank increases the target rate of inflation in response to higher rates of inflation.
B) the deviation of output from the natural level of output increases as result of higher rates of inflation.
C) higher rates of inflation generate positive supply shocks.
D) expectations of inflation increase as a result of higher inflation in previous periods.

Question

Quizplus · Accepted Answer

Expectations of inflation increase as a result of higher inflation in previous periods, leading to an upward shift in the Dynamic Aggregate Supply (DAS) curve. This is because workers and firms adjust their expectations of future inflation based on current and past inflation rates, which influences wage-setting and price-setting behavior.

Beginning at Long-Run Equilibrium in the Dynamic Model of Aggregate