Evaluate the following statements: "The price level generally begins to rise before full employment is reached. At full employment, additional spending tends to be purely inflationary".

Inflation is the sustained increase in the general price level of goods and services, which leads to a decrease in the purchasing value of money. Full employment is a situation in which all the available labor resources in an economy are being efficiently used, accounting for the natural rate of unemployment.

This statement is generally true. As the economy grows and demand for goods and services increases, businesses expand their production to meet the increasing demand. This expansion requires more labor and resources, so businesses hire more workers, reducing the unemployment rate. As we get closer to full employment, it becomes harder to find skilled workers, leading to wage increases. Additionally, as demand for goods and services outpaces the growth of supply, prices of these goods and services begin to rise – leading to inflation.

This statement is also generally true. When an economy is at full employment, demand for goods and services is high, whereas the ability to expand production or supply these goods and services is limited. Additional spending at this point would not significantly increase employment or production, as the economy is already operating at its maximum potential. As a result, any increase in spending would further stoke demand without a corresponding increase in supply, leading to an increase in price levels – or inflation. In conclusion, both statements are generally true – price levels tend to rise before full employment is reached, and additional spending at full employment is likely to be inflationary. These principles are based on the relationship between inflation, employment, and economic growth, and factors such as wage increases and production limitations play a key role in understanding these phenomena.