Narrbegin Exhibit 17.1 Aggregate demand and supply model -Beginning at equilibrium E₁ in Exhibit 17.1, when the government increases spending or cuts taxes the economy will experience: A) an inflationary recession. B) stagflation. C) cost-push inflation. D) demand-pull inflation.

Question

Quizplus · Accepted Answer

When the government increases spending or cuts taxes, it shifts the aggregate demand curve to the right, causing an increase in both price level and output. This results in demand-pull inflation, as the increase in demand outstrips the supply of goods and services in the economy. While there may be some temporary adjustment costs, such as price and wage stickiness, there is no reason to expect an inflationary recession, stagflation, or cost-push inflation in this scenario.