If demand-pull inflation occurs when the economy is already at potential GDP then, following the initial increase in aggregate demand, the
A) potential GDP line shifts leftward.
B) AS curve shifts leftward.
C) AS curve shifts rightward.
D) potential GDP line shifts rightward.
E) None of the above is correct because demand-pull inflation shifts only the aggregate demand curve.

Question

Quizplus · Accepted Answer

When demand-pull inflation occurs at potential GDP, the economy is operating at full capacity. The increase in aggregate demand leads to higher prices, causing the short-run aggregate supply (AS) curve to shift leftward as firms face higher production costs and resource constraints.

If Demand-Pull Inflation Occurs When the Economy Is Already at Potential