In the simple Keynesian model,
A)Inflation becomes a problem only if demand increases at full employment.
B)Inflation is a problem whenever demand increases.
C)Inflation is never a problem.

Question

Quizplus · Accepted Answer

In the simple Keynesian model, inflation only becomes a problem when demand increases at full employment because when the economy is operating below full employment, an increase in demand will simply cause an increase in output without affecting prices. However, at full employment, any additional demand will cause prices to rise as there is limited additional output that can be produced.

In the Simple Keynesian Model