Question

According to the dynamic​ AD-AS model, what is the most common cause of​ inflation? A. AD increases by more than LRAS. B. Total spending increases faster than total production. C. The U.S. Mint prints too much currency. D. All of the above. E. A and B only.

Answer 1

Answer: Option E

Explanation:

Inflation is an economic term that refers to a situation of continuous increase in the price level of goods and services. Inflation can either be as a result of a rise in demand or due to a rise in the production cost.

When the available resources in the economy are used in the production process, such economy will have little supply of products in the long run.

When there is an increase in aggregate demand as a result of other factors apart from the price of the product, there will be a rightward shift of the aggregate demand curve on the LRAS.

The rightward shift in aggregate demand curve will result into an increase in price but the quantity supplied does not increase which leads to inflation.

Answer 2

Answer:

A and B only.

That is

A. AD increases by more than LRAS.

B. Total spending increases faster than total production.

Explanation:

Inflation can be defined as loss of value of goods and services. The price of a basket of goods and services increases over time, meaning the purchasing power of money reduces.

In the AD-AS model inflation occurs of total spending occurs faster than total production. Goods and services become scarce, there is too much money chasing scare product, prices will go up resulting in reduction of purchasing power of money (inflation).

When AD increases more than the LRAS (long run aggregate supply) it results in shortage of goods and increase in price of goods.