Question

Suppose the economy was at full employment last year. Now supposed that the U.S. declared war on a country in the Middle East AND created a program ensuring all high school seniors could receive federal funding for college. Given this scenario, which of these would be MOST likely to take place? A) increased unemployment B) a decline in nominal wages C) decreased unemployment D) increased inflation

Answer 1

All the given conditions of the previous scenario, are dynamics associated with inflation, thus the correct answer is D) increased inflation

Full employment is a demand-pull effect of inflation, causing people to have more money to spend on goods, increasing the demand of products which will eventually lead businesses to raise prices, so supply and demand can be balanced. The increased liquidity created by federal funding for college works similar to the above.

On the other hand, war declarations cause a type of inflation called inflationary expectations. Businesses begin to raise prices not because of actual changes in supply or demand or the amount of money in circulation, but due to the fear that some such changes might happen.

Answer 2

D/increase inflation