1.__________ occurs when aggregate demand _________.The chain of causation is often:

a.Deflation; decreases; a drop in consumer and business spending that leads to a decrease in aggregate demand.When aggregate demand decreases, large surpluses of unsold inventory accumulate.This causes sellers to lower prices which leads to deflation and a drop in GDP.

b.Inflation: increases; an increase in consumer spending and often low interest rates; as spending rises, aggregate demand increases into segment III of the aggregate supply curve.This causes labor and equipment shortages which puts upward pressure on prices.As prices increase, the CPI increases and GDP increases.

c.Stagflation; decreases; an increase in input costs leads to higher prices and according to the law of demand, higher prices causes aggregate demand to fall.

d.Non-inflationary economic growth; increases; as taxes fall, consumer spending and business investment spending increases.This leads to an increase in aggregate demand, economic growth and a decrease in the CPI.

e.A and B only

f.C and D only