Refer to the Diagram $\mathrm { AS } _ { 2 }$

question 42

Multiple Choice

Refer to the diagram. Assume that nominal wages initially are set based on the price level P₂ and that the economy initially is operating at its full-employment level of output Q_f. In the short run, demand-pull inflation could best be shown as

• A) a move from b to c on A \(\mathrm { AS } _ { 2 }\)
• B) a move from b to c to d.
• C) a change of aggregate supply from A \(\mathrm { AS } _ { 2 } \text { to } A S _ { 3 } \text {. }\)
• D) a move from b to d.

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Definitions:

Deflation

A decrease in the general price level of goods and services, often leading to an increase in the real value of money.

Annual Interest Rate

The percentage of the principal that is paid as interest to the lender over the course of a year.

Consumer Price Inflation

The pace at which the average cost of goods and services elevates, resulting in diminished purchasing capacity.

CPI

The CPI, or Consumer Price Index, tracks the average variation in prices that urban customers pay for a selection of consumer goods and services over a period of time.