Question

What statement is correct? A) The money supply does not play a role in sustained inflation. B) Inflation initiated by an increase in money supply is referred to as demand-pull inflation. C) Inflation initiated by an increase in aggregate demand because of government spending is referred to as demand-pull inflation. D) In order to avoid “crowding-out” after the government has increased government spending, the Fed often decreases the money supply in order to lower the interest rates.

Answer 1

C) Inflation initiated by an increase in aggregate demand because of government spending is referred to as demand-pull inflation.

Answer 2

The right answer is C. Demand-pull inflation occurs, for example, when a government spends a great deal of money. This causes the aggregate demand (the total demand for final goods and services) to grow rapidly and eventually surpass the aggregate supply, and, consequently, prices go up (inflation).