How does the dynamic model of aggregate supply and aggregate demand explain inflation?

A. by showing that if total production in the economy grows faster than total spending, prices will rise

B. by showing that increases in labor productivity usually lead to increases in prices

C. by showing that if total spending in the economy grows faster than total production, prices will rise

D. None of the above.

Question

Business

Abel Mitchell

3 July, 07:30

How does the dynamic model of aggregate supply and aggregate demand explain inflation?

A. by showing that if total production in the economy grows faster than total spending, prices will rise

B. by showing that increases in labor productivity usually lead to increases in prices

C. by showing that if total spending in the economy grows faster than total production, prices will rise

D. None of the above.

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Answers (1)

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Carissa Porter · Answer 1

The correct answer is the letter C. by showing that if total spending in the economy grows faster than total production, prices will rise

Explanation:

The dynamic aggregate supply and demand model explains inflation as follows: In the short run, an economy's production capacity is limited to existing factors of production, ie there is little room to increase the amount of capital and thus the supply of goods and services. Thus, if aggregate demand, that is, the economy's consumption capacity grows faster than production capacity, that is, to supply goods and services, there will be demand inflation, which happens when aggregate consumption pressures aggregate supply, raising price levels.