Aggregate demand in India increased in 2008. In addition, real GDP grew strongly and inflation approached 10 percent. The best explanation for this inflation is that
A) aggregate supply did not change.
B) potential GDP decreased.
C) there was a movement up along the aggregate demand curve in 2008.
D) potential GDP increased, but at a slower rate than aggregate demand.

Question

Quizplus · Accepted Answer

The inflation in 2008 can be explained by the fact that while potential GDP increased, it did not keep pace with the rapid increase in aggregate demand, leading to demand-pull inflation.

Aggregate Demand in India Increased in 2008