In combating stagflation, how may an increase in government spending affect inflation and unemployment?
A) It may increase aggregate demand, which may help reduce inflation but aggravate unemployment.
B) It may increase aggregate demand, which may increase unemployment and inflation.
C) It may increase aggregate demand, which may help reduce unemployment but aggravate inflation.
D) It may increase aggregate demand, which may help reduce unemployment and inflation.

Question

In combating stagflation, how may an increase in government spending affect inflation and unemployment?  
A) It may increase aggregate demand, which may help reduce inflation but aggravate unemployment. 
B) It may increase aggregate demand, which may increase unemployment and inflation. 
C) It may increase aggregate demand, which may help reduce unemployment but aggravate inflation. 
D) It may increase aggregate demand, which may help reduce unemployment and inflation.

Quizplus · Accepted Answer

An increase in government spending will increase aggregate demand which can potentially reduce unemployment but aggravate inflation - this is due to increased demand causing prices to rise. Therefore, the best answer is C.

In Combating Stagflation, How May an Increase in Government Spending