In the long run, demand-pull inﬂation
A) starts out with a shift in the AS curve but no shift of the AD curve.
B) starts out with a rightward shift in the AD curve, followed by a resulting leftward shift of the short-run AS curve.
C) starts out with a leftward shift in the AD curve, followed by a resulting rightward shift of the short-run AS curve.
D) involves a shift of the AD curve only, with no shift of the AS curve.

Question

Quizplus · Accepted Answer

Demand-pull inflation starts out with a rightward shift in the AD curve, which results in an increase in both price level and real GDP in the short run. However, over time, the increase in price level leads to a decrease in real GDP due to the resulting leftward shift of the short-run AS curve. This is because higher prices lead to higher costs of production, reducing the profitability of firms and leading to a decrease in output. Thus, demand-pull inflation involves a rightward shift in the AD curve followed by a resulting leftward shift of the short-run AS curve.

In the Long Run, Demand-Pull Inﬂation