Inflation from Demand-Supply Imbalance

Steps:

• Inflation occurs when aggregate demand exceeds aggregate supply, raising prices.
• Option A: Demand decreases (shifts left) and supply increases (shifts right), lowering prices.
• Option B: Both decrease, reducing pressure on prices or causing deflation.
• Option C: Demand increases (shifts right) and supply decreases (shifts left), both raising prices significantly.
• Option D: Both increase, balancing to stable or lower prices.

Why C is correct:

• In the AD-AS model, rising AD causes demand-pull inflation, while falling AS causes cost-push inflation; together, they amplify price increases.

Why the others are wrong:

• A: Offsets reduce inflationary pressure.
• B: Contractions ease price upward movement.
• D: Balances prevent net inflation rise.

Final answer: C