The following image shows the aggregate demand and aggregate supply curves of an economy. In the graph below, the rise in the price levels from P₁ to P₂ is a result of: A) cost-pull inflation. B) cost-push inflation. C) demand-push inflation. D) demand-pull inflation. E) induced inflation.

Question

Quizplus · Accepted Answer

The rise in price levels is due to an increase in aggregate demand, which shifts the AD curve from AD1 to AD2. This is demand-pull inflation, as the increase in demand is pulling up the price levels. Cost-push inflation would occur if there were a decrease in aggregate supply, which would shift the AS curve upward.

The Following Image Shows the Aggregate Demand and Aggregate Supply