At full employment, an increase in the quantity of money ceteris paribus) can start
A)demand- pull inflation, as can an increase in government expenditure.
B)cost- push inflation, but an increase in government expenditure cannot.
C)demand- pull and a cost- push inflation, as can an increase in government expenditure.
D)cost- push inflation, as can an increase in government expenditure.
E)demand- pull inflation, but an increase in government expenditure cannot.

Question

Quizplus · Accepted Answer

At full employment, an increase in the quantity of money would lead to an increase in aggregate demand. This, in turn, can lead to demand-pull inflation, where increased demand for goods and services push up their prices. Similarly, an increase in government expenditure can also increase aggregate demand and lead to demand-pull inflation. Cost-push inflation arises due to an increase in production costs, such as wages or raw materials, and a rise in prices to maintain profit margins. An increase in government expenditure, by itself, cannot lead to cost-push inflation.

At Full Employment, an Increase in the Quantity of Money