Answer to Question #94447 in Macroeconomics for Nomthandazo

Question

which one of the following statement regarding demand-pull inflation is correct
(1) demand-pull inflation usually leads to increase in the general price level and unemployment
(2) demand-pull inflation can be combated by the reducing the interest rate
(3) demand-pull inflation is a result of expansionary policies
(4) demand-pull inflation provides a good explanation for te phenomenon of stagflation

Answer 1

C is correct because expansionary policies aims to reduce unemployment rates which can be achieved through increasing money supply to induce the demand which causes demand for labor to increase supply.

A is wrong because demand pull inflation reduces unemployment.

B is wrong because a reduction in interest rate increases the money supply which result in higher disposable income that increases aggregate demand.

D is wrong because stagflation is characterized by high unemployment.