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Chapter 17: Problem 12

Demand-pull inflation is caused by a. monopoly power b. energy cost increases. c. tax increases. d. full employment.

Short Answer

Expert verified
d. Full Employment

Step by step solution

01

Understand Demand-Pull Inflation

Before analyzing each option, it is essential to grasp the concept of demand-pull inflation. It occurs when the aggregate demand in an economy is higher than its supply, leading to an increase in the general price level. This type of inflation can be driven by multiple factors, including increased consumer spending, government spending, or investment by businesses.
02

Analyze Option a: Monopoly Power

Monopoly power refers to a firm's ability to control the supply of goods and services, which enables them to set higher prices. While this may cause an increase in prices, it is not necessarily related to an increase in aggregate demand. Thus, monopoly power is not the primary cause of demand-pull inflation.
03

Analyze Option b: Energy Cost Increases

An increase in energy cost may lead to cost-push inflation, not demand-pull inflation. In cost-push inflation, the general price level increases due to higher production costs, such as increased energy costs. Since it does not increase aggregate demand, it is not the correct cause of demand-pull inflation.
04

Analyze Option c: Tax Increases

Tax increases are also not directly linked to demand-pull inflation. In general, tax increases may decrease aggregate demand, as consumers have less disposable income to spend. As a result, this option is not the correct cause of demand-pull inflation.
05

Analyze Option d: Full Employment

Full employment is a situation where all available labor resources are being used most efficiently. When an economy reaches full employment, aggregate demand is typically high, as more individuals have income to spend on goods and services. This high aggregate demand can outpace the economy's production capacity, leading to demand-pull inflation.
06

Choose The Correct Option

Based on the analysis of each option, the correct answer is: d. Full employment. This answer correctly identifies full employment as the primary cause of demand-pull inflation, as it is directly related to increased aggregate demand in the economy.

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Most popular questions from this chapter

If the consumer price index in year \(X\) was 300 and the CPI in year \(Y\) was \(315,\) the rate of inflation was a. 5 percent. b. 15 percent. c. 25 percent. d. 315 percent.

Suppose you place \(\$ 10,000\) in a retirement fund that earns a nominal interest rate of 8 percent. If you expect inflation to be 5 percent or lower, then you are expecting to earn a real interest rate of at least a. 1.6 percent. b. 3 percent. c. 4 percent. d. 5 percent.

Which of the following statements is true? a. Demand-pull inflation is caused by excess total spending. b. cost-push inflation is caused by an increase in resource costs. c. If nominal interest rates remain the same and the inflation rate falls, real interest rates increase. d. If real interest rates are negative, lenders incur losses. e. All of the above are true.

If the nominal rate of interest is less than the inflation rate, a. lenders win. b. savers win. c. the real interest rate is negative. d. the economy is at full employment.

When the inflation rate rises, the purchasing power of nominal income a. remains unchanged. b. decreases. c. increases. d. changes by the inflation rate minus one.
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