Suppose self-correction works.Then, all things equal, a policy that continually increases aggregate demand is implemented.What kind of economic outcome will this policy lead to?
A) The policy will have a strong effect on GDP.
B) The policy will cause permanent inflation.
C) The policy will eventually cause the SRAS curve to shift to the right.
D) The policy will cause deflation.

Question

Suppose self-correction works.Then, all things equal, a policy that continually increases aggregate demand is implemented.What kind of economic outcome will this policy lead to?  
A) The policy will have a strong effect on GDP. 
B) The policy will cause permanent inflation. 
C) The policy will eventually cause the SRAS curve to shift to the right. 
D) The policy will cause deflation.

Quizplus · Accepted Answer

A policy that continually increases aggregate demand, assuming self-correction mechanisms work, will lead to permanent inflation. This is because continually increasing demand without corresponding increases in supply puts upward pressure on prices, leading to inflation.

Suppose Self-Correction Works