Budget deficits are inflationary when
A)the Federal Reserve contracts the money supply.
B)the economy has lots of slack and the aggregate supply curve is horizontal.
C)the economy is at full employment and the aggregate supply curve is vertical.
D)private citizens buy the bonds to finance the debt.

Question

Quizplus · Accepted Answer

Budget deficits are inflationary when the economy is at full employment and the aggregate supply curve is vertical. In this situation, any increase in demand, created by the government's large borrowing, will result in higher prices instead of higher output, as the economy is already at full capacity.

Budget Deficits Are Inflationary When