Exhibit 10-4 Aggregate supply and demand curves The increase in the price level as the economy moves from E₁ to E₂ in Exhibit 10-4 represents: A) cost-push inflation. B) demand-shock inflation. C) wage push inflation. D) demand-pull inflation.

Question

Quizplus · Accepted Answer

The increase in the price level as the economy moves from E₁ to E₂ represents demand-pull inflation because the increase in aggregate demand (shift of AD to the right) causes an increase in both output and prices. Cost-push inflation would occur if there was a negative supply shock that caused a decrease in the quantity of output supplied at every price level, leading to an increase in prices. Wage push inflation occurs when wage rates increase and firms increase prices to cover the higher labor costs. Demand shock inflation occurs when there is an unexpected change in aggregate demand, such as a sudden increase in government spending or a dramatic shift in consumer confidence.

Exhibit 10-4 Aggregate Supply and Demand Curves