Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, output _____ and inflation _____.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases

Question

Quizplus · Accepted Answer

In the first period of a four-period positive demand shock, output increases as firms increase production to meet the higher demand. However, the increase in demand puts upward pressure on prices, leading to an increase in inflation. This is consistent with the basic principles of the dynamic model of aggregate demand and aggregate supply, which predicts that output and inflation move in opposite directions in response to changes in aggregate demand.

Beginning at Long-Run Equilibrium in the Dynamic Model of Aggregate