The economy experiences an increase in the price level and a decrease in real domestic output. Which of the following is a likely explanation?
A) Productivity has increased.
B) Input prices have increased.
C) There has been an increase in government spending.
D) Government regulations have been reduced.

Question

Quizplus · Accepted Answer

An increase in the price level and a decrease in real domestic output is typically associated with cost-push inflation, meaning that input prices have increased. This can lead to businesses reducing their supply due to the higher cost of production, thus decreasing real domestic output. A decrease in government regulations (D) or an increase in government spending (C) may cause an increase in real domestic output, while an increase in productivity (A) would lead to an increase in real domestic output without a corresponding increase in the price level.

The Economy Experiences an Increase in the Price Level and a Decrease