In the short run, how does inflation affect real GDP?

In the short run, inflation can lead to an increase in real GDP due to the relationship between aggregate demand, aggregate supply, and the prices of goods and services. When inflation occurs, it often results from an increase in aggregate demand, which can happen because of factors like consumer optimism, increased government spending, or expansionary monetary policy. This rise in demand can result in businesses responding by producing more goods and services, leading to higher output and, consequently, an increase in real GDP.

Additionally, if prices rise but nominal wages and other costs do not immediately adjust, businesses may benefit from higher profit margins, motivating them to enhance production levels in the short term. This scenario aligns with the upward-sloping short-run aggregate supply curve, where higher demand causes firms to respond by producing more until they reach capacity constraints.

Overall, the dynamics of short-term inflation often stimulate economic activity, leading to a temporary boost in real GDP.