To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in ______, and the aggregate demand curve shifts upward because of increases in ______.
A) the expected price level; the money supply
B) the money supply; the expected price level
C) output; the price level
D) the price level; output

Question

Quizplus · Accepted Answer

Inflation inertia can be illustrated in an aggregate demand-aggregate supply model by an upward shift in the short-run aggregate supply curve due to increases in the expected price level, and an upward shift in the aggregate demand curve due to increases in the money supply. This reflects how expectations of higher prices can lead to wage and price adjustments that shift the supply curve, while increases in the money supply boost spending and demand.

To Illustrate Inflation Inertia in an Aggregate Demand-Aggregate Supply Model