When does a rise in aggregate demand primarily impact prices the most?

Show Answers

When aggregate supply is unresponsive to price changesWhen aggregate supply responds significantly to price changesWhen aggregate supply changes proportionally with priceWhen aggregate demand does not respond to price variationsWhen aggregate demand is highly sensitive to price

Explanation

The effect of an increase in aggregate demand on prices depends largely on the responsiveness of aggregate supply. If aggregate supply is price elastic, meaning it can increase output significantly as prices rise, then price levels will be more affected. Conversely, if supply is inelastic, output cannot adjust easily, limiting price changes. Therefore, prices are most influenced when aggregate supply is price elastic.