Question

How does the dynamic model of aggregate supply and aggregate demand explain​ inflation? A. by showing that if total spending in the economy grows faster than total​ production, prices will rise B. by showing that increases in labor productivity usually lead to increases in prices C. by showing that if total production in the economy grows faster than total​ spending, prices will rise D. None of the above.

Answer 1

The correct answer is option A.

Step-by-step explanation:

The dynamic model of aggregate supply and aggregate demand shows that if an economy the total spending in the economy increases faster than total production, there will be a shortage. This shortage will cause the price level to increase and will ultimately lead to inflation.

When the increase in aggregate demand is greater than the increase in aggregate supply, it will create a shortage in the economy. The demand for goods and services will be more than the supply of goods and services. This will cause the price level to increase.