In which of the following sets of circumstances can we conﬁdently expect inﬂation?
A) Aggregate supply and aggregate demand both increase.
B) Aggregate supply and aggregate demand both decrease.
C) Aggregate supply decreases and aggregate demand increases.
D) Aggregate supply increases and aggregate demand decreases.

Question

Quizplus · Accepted Answer

When aggregate supply decreases and aggregate demand increases, it creates a situation of excess demand where demand exceeds the supply of goods and services. This leads to an increase in prices and a decrease in the purchasing power of money. Hence, we can confidently expect inflation in this situation. In all other choices, the relationship between supply and demand is balanced or moving in the opposite direction, which is less likely to lead to inflation.

In Which of the Following Sets of Circumstances Can We