Question

Inflation is more likely to be caused by a shift in an economy’s aggregate demand rather than a shift in its aggregate supply. Discuss the given statement.

Answer 1

Inflation occurs due to demand and supply side factors.

Rightward shift in demand curve: It will raise price from P to P1 which will raise inflation.

Leftward shift in demand curve: It will reduce price from P to P1 which will reduce inflation.

Letward shift in supply curve: It will raose price from P to P1 which will raise inflation.

Rightward shift in supply curve: It will reduce price from P to P1 which will reduce inflation.

Thus, we cannot say that only shift in aggregate demand curve affects inflation because shift in aggregate supply curve also affects inflation.