If government uses its stabilization policies to maintain full employment under conditions of cost- push inﬂation,
A) a deﬂationary spiral is likely to occur.
B) an inﬂationary spiral is likely to occur.
C) stagﬂation is likely to occur.
D) the Phillips Curve is likely to shift inward.

Question

Quizplus · Accepted Answer

When the government uses stabilization policies to maintain full employment during cost-push inflation, it often involves increasing spending or cutting taxes, which can add to demand. This can lead to an inflationary spiral because the increased demand in the face of already rising costs (due to the cost-push inflation) can cause prices to rise even further.

If Government Uses Its Stabilization Policies to Maintain Full Employment