Use the AS/AD model to explain why when aggregate demand increases at its usual rate, the rise in energy prices will lead to slower economic growth.
Slower economic growth occurs because rising energy prices ______________.
Wrong! - How do firms respond when energy prices rise? Does rising energy prices influence short-run aggregate supply or long-run aggregate supply?
That's Right! - An increase in aggregate demand increases real GDP. Rising energy prices increase firms’ costs and decrease short-run aggregate supply, which decreases real GDP. So, with rising energy prices, real GDP increases by a smaller amount than it would otherwise, and economic growth slows.
