It is inflationary for government to increase spending if:
A) it also cuts taxes.
B) the aggregate supply curve is flat.
C) the economy is at full employment.
D) equilibrium real GDP is well below full employment.

Question

Quizplus · Accepted Answer

If the economy is already at full employment, an increase in government spending will lead to demand-pull inflation, as there are no more available resources to produce additional goods and services. This means an increase in spending will only increase demand, driving up prices, without increasing output or employment.

It Is Inflationary for Government to Increase Spending If