Assuming the economy is starting at the natural rate of output and everything else held constant,the effect of ________ in aggregate ________ is a rise in both inflation and output in the short-run,but in the long-run the only effect is a rise in inflation.
A)a decrease;supply
B)a decrease;demand
C)an increase;supply
D)an increase;demand

Question

Quizplus · Accepted Answer

An increase in aggregate demand will lead to an increase in both inflation and output in the short run due to firms increasing production to meet the increased demand. However, in the long run, the economy will reach its natural rate of output and the only effect will be a rise in inflation. Therefore, choice D (an increase in demand) is the correct answer.

Assuming the Economy Is Starting at the Natural Rate of Output