Expansionary fiscal policy will produce inflation only if
A)it takes the form of a cut in personal income taxes.
B)it takes the form of a cut in corporate profit taxes.
C)it takes the form of an increase in government spending.
D)it is accompanied by a sustained increase in the money supply.

Question

Quizplus · Accepted Answer

Expansionary fiscal policy can increase aggregate demand, leading to higher prices and inflation. However, this will only occur if the expansionary fiscal policy is accompanied by a sustained increase in the money supply. This is because an increase in aggregate demand will only be inflationary if it outstrips the capacity of the economy to produce goods and services, which can only happen if there is a corresponding increase in the money supply. Therefore, choice D is the correct answer.

Expansionary Fiscal Policy Will Produce Inflation Only If