Changes in Aggregate Demand Can Cause Inflation to Rise Above

question 101

True/False

Changes in aggregate demand can cause inflation to rise above or fall below the expected rate of inflation.

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Definitions:

Inflation Fallacy

The inflation fallacy refers to the mistaken belief that inflation erodes the real value of money without considering that wages may also rise with inflation.

Nominal Incomes

The amount of money earned by individuals or entities, not adjusted for inflation, expressed in current dollars.

Real Income

The purchasing power of an individual's or household's income, adjusted for inflation, indicating the quantity of goods and services that can be purchased.

Fisher Effect

describes the relationship between nominal interest rates, real interest rates, and inflation, stating that the nominal interest rate is equal to the sum of the real interest rate and the expected inflation rate.