CFA Level I · CFA Level I Exam · Understanding Business Cycles
An economy is experiencing a rise in prices that is driven by a sharp increase in aggregate demand while output is above potential. This situation is best described as:
This is demand-pull inflation. Aggregate demand rises faster than the economy's productive capacity, output exceeds potential, and the price level is bid up. Cost-push inflation instead stems from higher input costs shifting aggregate supply leftward and usually reduces output.
- Acost-push inflation.
- Bdemand-pull inflation.Correct
- Cstructural unemployment.
Explanation
Inflation caused by rising aggregate demand pushing output above potential is demand-pull inflation. Cost-push inflation arises from higher input costs shifting aggregate supply left, typically with falling output. Structural unemployment is not an inflation type.
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