In the short run, demand-pull inﬂation increases
A) real wages, but in the long run only nominal wages.
B) nominal wages, but in the long run only real wages.
C) real output and the price level, but in the long run only real output.
D) real output and the price level, but in the long run only the price level.

Question

Quizplus · Accepted Answer

Demand-pull inflation leads to an increase in both real output and the price level in the short run. However, in the long run, firms will increase their production to meet the higher demand and the economy will operate at its full capacity level, known as the natural rate of output. At this point, further increases in demand will only result in a higher price level and not an increase in real output. Therefore, in the long run, the only effect of demand-pull inflation is on the price level.

In the Short Run, Demand-Pull Inﬂation Increases