-An economy is at potential GDP and the price level is 100 in the figure above. If aggregate demand unexpectedly increases so that the aggregate demand curve shifts to AD₁, in the short run the inflation rate is A) 0 percent a year. B) 10 percent a year. C) 20 percent a year. D) More than 20 percent a year.

Question

Quizplus · Accepted Answer

When aggregate demand increases, it typically leads to higher prices and output in the short run, assuming the economy starts at potential GDP. A shift in the aggregate demand curve to the right (as indicated by the question) would increase the price level from its original level. Without specific numbers from the figure mentioned, a common outcome in such scenarios is an inflation rate that is positive but not excessively high, making an answer like 10 percent a year plausible in comparison to the other options provided.

-An Economy Is at Potential GDP and the Price Level