What typically occurs when aggregate demand increases while aggregate supply remains constant?

• A. Prices typically decrease
• B. Higher prices and potential inflation occur
• C. Output increases significantly
• D. Employment rates rise immediately

Answer: (B)

When aggregate demand increases while aggregate supply remains constant, the result typically leads to higher prices and potential inflation. This phenomenon occurs because the increased demand for goods and services outpaces the economy's capacity to produce them, which creates upward pressure on prices.

As consumers and businesses demand more products, and if production does not rise correspondingly due to constraints like fixed resources or existing production capacities, sellers can raise prices. This scenario is often illustrated by the aggregate demand and aggregate supply model, where a rightward shift in the aggregate demand curve leads to a higher equilibrium price level without a significant change in the quantity of goods supplied.

Consequently, while there may be short-term benefits such as increased consumer spending and economic activity, the key takeaway is that the imbalance caused by constant aggregate supply alongside rising aggregate demand is likely to lead to inflationary pressures.