Refer to the figure above. If the economy is operating at full employment when its aggregate demand curve is AD₂, then a further increase in consumption and investment spending will cause: A) Cost-push inflation, and the new equilibrium output will be less than Q₂ B) Demand-pull inflation, and the new equilibrium output will be less than Q₂ C) Demand-pull inflation, and the new equilibrium output will be more than Q₂ D) Cost-push inflation, and the new equilibrium output will be more than Q₂

Question

Quizplus · Accepted Answer

If the economy is already operating at full employment and there is an increase in consumption and investment spending, it will cause an increase in aggregate demand. As a result, this will lead to demand-pull inflation and the new equilibrium output will be at a higher level than the previous one. Therefore, the correct answer is (C).

Refer to the Figure Above