Increases in aggregate demand

Question

Quizplus · Accepted Answer

Increases in aggregate demand typically result in inflation only when the economy is already operating at or near its maximum productive capacity. At this point, any further increase in demand can only be met with higher prices, as there is no additional capacity to produce more goods and services. In contrast, if the economy has considerable excess capacity, an increase in demand may lead to an increase in output and employment rather than inflation.

Increases in Aggregate Demand