📚 Learning Guide
Aggregate Demand and Supply Shifts
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If an increase in aggregate demand is to rising inflation as a decrease in aggregate supply is to what economic outcome?

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Choose the Best Answer

A

Rising unemployment

B

Lower inflation

C

Increased investment

D

Stable prices

Understanding the Answer

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Answer

When aggregate demand increases, it can lead to rising inflation because more people want to buy goods and services than what is available. Similarly, if there is a decrease in aggregate supply, it can lead to higher prices as well, but for a different reason. When there is less supply of goods and services, it means that there is not enough to meet the demand, which can cause prices to rise as consumers compete for the limited products. For example, if a natural disaster reduces the number of cars produced, fewer cars are available for sale, and this can drive up car prices. So, a decrease in aggregate supply can lead to inflation, just like an increase in aggregate demand.

Detailed Explanation

When supply goes down, fewer goods are made. Other options are incorrect because Some might think less supply means lower prices; People may believe that less supply encourages investment.

Key Concepts

Aggregate Demand and Supply Shifts
Phillips Curve
Inflation and Unemployment Relationship
Topic

Aggregate Demand and Supply Shifts

Difficulty

medium level question

Cognitive Level

understand

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