CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

Higher than expected aggregate demand will result in an inflation that is like a ______ one.
A. demand-pull
B. demand-push
C. cost-push
Explanation: If aggregate demand grows faster than expected, real GDP moves above potential GDP, the inflation rate exceeds its expected rate, and the economy behaves like it does with demand-pull inflation.

User Contributed Comments 4

User Comment
MaiHuong Demand increase so it should be demand-pull
ronrun it's a cost-push inflation. The causes of demand-pull are increases in the money supply, increases in government purchases and depreciations of local exchange rates.
surob This is a demand pull inflation for sure. Here is why: If AD increases more than expected, actual inflation will be more than expected. Right? Money wages won't adjust enough because of different inflation expectations. (lower inflation expectation). So, SAS curve doesn't shift leftward enough to keep economy at full employment. But wages will eventually increase, and SAS descrease again. The economy experiences more inflation as it returns to full employment. This inflation is like a demand pull inflation.
steved333 If aggregate demand increases by more than expected, inflation is higher than expected. Money wages do not adjust enough, and the SAS curve does not shift leftward enough to keep the economy at full employment. Real GDP exceeds potential GDP.

Wages eventually rise, which leads to a decrease in the SAS. The economy experiences more inflation as it returns to full employment. This inflation is like a demand-pull inflation.
You need to log in first to add your comment.