Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 32: Q. 8. (page 781)

Use the AD/AS model to show how increases in government spending can lead to more inflation.

Short Answer

Expert verified

Inflation refers to the situation when the general price level in the economy increases. It leads to erosion in the value of cash holdigns as the purchasing power of money declines.

Step by step solution

01

Step 1. Inflation

Inflation refers to the situation when the general price level in the economy increases. It leads to erosion in the value of cash holdigns as the purchasing power of money declines.

02

Step 2. Basically, when government spending increases it results into rise of inflation as:-

a) When money in the market increases without increase in supply of goods then in that case it results into more money chasing a few output/goods i.e. the demand of goods increases without any increase in the output/goods.

b) When government spending focuses more on revenue expenditure without taking into consideration capital expenditure then again demand in the market increases without increase in the output. Thus, results into more inflation.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Explain how the natural rate of unemployment may be higher in low-income countries.

Using the data in Table 32.3, rank the seven regions of the world according to GDP and then according to GDP per capita.

Is inflation likely to be a severe problem for at least some high-income economies in the near future?

Is inflation likely to be a problem for at least some low- and middle-income economies in the near future?

What are the different policy tools for dealing with cyclical unemployment?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free