It is inflationary for government to increase spending if:
A) it also cuts taxes.
B) the aggregate supply curve is flat.
C) the economy is at full employment.
D) the equilibrium real GDP is well below full employment.

Question

Quizplus · Accepted Answer

If the economy is already at full employment, an increase in government spending would create increased demand for goods and services without an increase in supply, which in turn would increase prices and create inflation. Therefore, it is inflationary for the government to increase spending when the economy is at full employment.

It Is Inflationary for Government to Increase Spending If