A stimulus to aggregate demand will normally pull prices up but cause a reduction in output.

Question

Quizplus · Accepted Answer

This statement is incorrect. A stimulus to aggregate demand, such as an increase in government spending or a tax cut, will generally lead to an increase in both prices and output in the short run, as firms respond to the higher demand by producing more goods and services. However, over the longer term, the increased demand can push up inflation and lead to a decrease in output if firms are unable to keep up with the increased demand or if resources become scarce.

A Stimulus to Aggregate Demand Will Normally Pull Prices Up