At full employment, an increase in the quantity of money (ceteris paribus)can start
A)demand-pull inflation, as can an increase in government expenditure.
B)demand-pull inflation, but an increase in government expenditure cannot.
C)cost-push inflation, as can an increase in government expenditure.
D)cost-push inflation, but an increase in government expenditure cannot.
E)demand-pull and a cost-push inflation, as can an increase in government expenditure.

Question

Quizplus · Accepted Answer

At full employment, an increase in the quantity of money can lead to an increase in aggregate demand, resulting in higher demand-pull inflation. Similarly, an increase in government expenditure can also lead to a higher level of aggregate demand, resulting in demand-pull inflation. Therefore, both options (A) and (E) are possible, but (A) is the better choice as it directly responds to the given scenario.

At Full Employment, an Increase in the Quantity of Money