A given reduction in government spending will dampen demand-pull inflation by a greater amount when the:
A) Economy's MPS is large
B) Economy's aggregate supply curve is flat
C) Economy's aggregate supply curve is steep
D) Unemployment rate is high

Question

Quizplus · Accepted Answer

When the economy's aggregate supply curve is steep, a reduction in government spending will have a greater impact on reducing demand-pull inflation. This is because the steep aggregate supply curve indicates that the economy is operating close to its potential output, so any reduction in demand will have a larger impact on reducing inflationary pressures. Choices A and D are not directly related to the impact of government spending on demand-pull inflation, and choice B is not relevant as it pertains to the impact of changes in aggregate demand on the price level, not the impact of government spending specifically.

A Given Reduction in Government Spending Will Dampen Demand-Pull Inflation