If persistent inflation was due to declines in long-run aggregate supply, what pattern would be observed?
A) Increases in the price level would occur simultaneously with decreases in real GDP.
B) Increases in the price level would occur simultaneously with increases in real GDP.
C) Only prices of goods would increase; prices of services would remain constant.
D) Only prices of services would increase; prices of goods would remain constant.

Question

Quizplus · Accepted Answer

If persistent inflation was due to declines in long-run aggregate supply, then there would be a decrease in the economy's capacity to produce goods and services. This would lead to an increase in the prices of goods and services, which would lead to a decrease in real GDP. Thus, increases in the price level would occur simultaneously with decreases in real GDP.

If Persistent Inflation Was Due to Declines in Long-Run Aggregate