A given reduction in government spending will dampen demand-pull inﬂation by a greater amount when the
A) economy's MPS is large.
B) economy's aggregate supply curve is ﬂat.
C) economy's aggregate supply curve is steep.
D) unemployment rate is high.

Question

Quizplus · Accepted Answer

When the economy's aggregate supply curve is steep, a reduction in government spending will have a greater impact on reducing demand-pull inflation. This is because a steep aggregate supply curve means that the economy is operating close to its potential output, so any decrease in demand will result in a greater reduction in prices and inflation. When the economy's MPS is large, a reduction in government spending could potentially lead to a decrease in consumption and a contraction in the economy, which could offset the decrease in inflation. The flatness of the aggregate supply curve and the level of unemployment do not necessarily have a direct impact on the effectiveness of reducing demand-pull inflation through government spending cuts.

A Given Reduction in Government Spending Will Dampen Demand-Pull Inﬂation