A cost-push inflation spiral results if the Fed's response to stagflation is to keep
A) decreasing aggregate demand.
B) decreasing aggregate supply.
C) increasing aggregate demand.
D) increasing aggregate supply.

Question

Quizplus · Accepted Answer

A cost-push inflation spiral can result if the Federal Reserve responds to stagflation by increasing aggregate demand. This is because increasing aggregate demand in the face of already high costs (due to cost-push inflation) can lead to further increases in prices without necessarily improving output significantly, thus exacerbating inflation.

A Cost-Push Inflation Spiral Results If the Fed's Response to Stagflation