In the dynamic model of aggregate demand and aggregate supply, holding other factors constant, when the natural level of output increases, then inflation:
A) increases.
B) decreases.
C) remains the same.
D) is zero.

Question

Quizplus · Accepted Answer

When the natural level of output increases, the economy is able to produce more goods and services without experiencing inflation. This is because the increase in output is met by an increase in the supply of labor and capital, which keeps prices from rising.

In the Dynamic Model of Aggregate Demand and Aggregate Supply