Which of the following statements correctly identifies a reason inflation can be used as a countercyclical policy tool?
A) Inflation reduces money costs and hence stimulates an economy during slowdowns.
B) Inflation increases consumer demand, which is necessary for combating slowdowns.
C) Inflation sometimes increases the demand for workers, which increases output and helps combat slowdowns.
D) Inflation increases consumer confidence, which is an absolute necessity to counter act business cycles.

Question

Quizplus · Accepted Answer

Inflation can be used as a countercyclical policy tool because it can increase the demand for workers, which can lead to higher output and help combat slowdowns. When prices are rising, firms may need to hire more workers to meet the increased demand, which can help to boost employment and output. This makes inflation an attractive policy tool during times of economic slowdown or recession, when unemployment is a major concern. However, policymakers must be careful not to let inflation get out of hand, as high inflation can be damaging to the economy in the long-term.

Which of the Following Statements Correctly Identifies a Reason Inflation