Inflation can occur under conditions of full employment
A) only if the central bank continues to inject money into the economy and the agents' expectations of inflation are supported by the bank's activities.
B) only if the central bank continues to inject money into the economy.
C) only if the central bank continues to withdraw money from the economy.
D) only if the central bank continues to inject money into the economy and all agents expect that inflation will not occur.
E) only if the central bank fails to inject money into the economy.

Question

Quizplus · Accepted Answer

Inflation can occur under conditions of full employment if the central bank continues to inject money into the economy and the agents' expectations of inflation are supported by the bank's activities. When there is full employment, any increase in demand can only be met with an increase in prices, leading to inflation. Therefore, if the central bank continues to inject money into the economy without any corresponding increase in output, this can lead to an increase in demand and inflation. However, for inflation to persist, agents' expectations of inflation must also be supported by the central bank's activities. If the central bank indicates that it will take steps to control inflation, agents' expectations will adjust accordingly, mitigating the inflationary pressures.

Inflation Can Occur Under Conditions of Full Employment