Inflation occurs whenever
A) aggregate demand rises.
B) the price of any given commodity rises.
C) the money supply increases more rapidly than output.
D) the tax rate is lower than the government spending rate.
E) the money supply falls.

Question

Quizplus · Accepted Answer

Inflation occurs when the money supply (i.e., the amount of money in circulation) increases more rapidly than the output of goods and services in the economy. This creates too much money chasing too few goods, driving up prices. Aggregate demand (A) may contribute to inflation, but it is not the sole cause. The price of any given commodity (B) may rise due to supply and demand factors specific to that commodity, but this is not inflation unless it is occurring economy-wide. The tax rate and government spending rate (D) do not necessarily relate to inflation. A fall in the money supply (E) would actually lead to deflation, not inflation.

Inflation Occurs Whenever