Draw a conventional aggregate demand curve on a graph. Then add three different aggregate supply curves, labeled AS1: Horizontal curve AS2: Upward-sloping curve AS3: Vertical curve all intersecting the AD curve at the same point.
If AD were to increase which AS curve would lead to the least inflation? Show the graph roughly
Ans. An increase in aggregate demand will lead to least inflation if the aggregate supply is horizontal because horizontal aggregate supply means that the production units are willing to produce any amount of output at given price level, P. So, price remains the same after increase in aggregate demand from AD to AD' while it increases to P' in case of upward sloping aggregate supply curve and to P" in case of vertical aggregate supply curve.
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