Which of the following can cause demand-pull inflation if the economy is currently in equilibrium at full-employment GDP? A reduction in government spending plus an increase in taxes. A decrease in imports plus an increase in exports. An increase in the company income tax rate plus higher interest rates. A decrease in real wages. An increase in real interest rates plus a decrease in nominal interest rates.
Question
Which of the following can cause demand-pull inflation if the economy is currently in equilibrium at full-employment GDP?
A reduction in government spending plus an increase in taxes.
A decrease in imports plus an increase in exports.
An increase in the company income tax rate plus higher interest rates.
A decrease in real wages.
An increase in real interest rates plus a decrease in nominal interest rates.
Solution
The correct answer is: A decrease in imports plus an increase in exports.
Here's why:
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Demand-pull inflation occurs when demand for goods and services exceeds their supply. It can be caused by any factor that increases demand.
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If an economy is currently in equilibrium at full-employment GDP, it means that all available resources are being used efficiently, and the economy is producing at its maximum capacity.
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A decrease in imports means that domestic consumers are buying less from foreign producers. This could be due to various reasons such as tariffs, quotas, or a decrease in the quality or availability of imported goods.
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An increase in exports means that foreign consumers are buying more from domestic producers. This could be due to various reasons such as a favorable exchange rate, increased demand in foreign markets, or an increase in the quality or availability of domestically produced goods.
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Both of these changes would lead to an increase in demand for domestically produced goods and services. If the economy is already at full employment, it cannot increase production to meet this increased demand.
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As a result, prices would rise, leading to demand-pull inflation. Therefore, a decrease in imports plus an increase in exports can cause demand-pull inflation if the economy is currently in equilibrium at full-employment GDP.
Similar Questions
Inflation can be caused byGroup of answer choicesRising rate of unemployment.Firms moving production to countries with lower labor costs.Rising interest rates.Increased total demand for goods and services.
Inflation affects an economy by:A.limiting international trade opportunities.B.making prices rise over time.C.reducing the size of the labor market.D.increasing the value of currency.
Explain the concept of demand-pull inflation.
Which of the following is an example of demand-pull inflation?Mobile manufacturers increasing the prices of their highest-selling models as more and more people line up to buy themCosmetics manufacturers increasing the prices of their organic products as a flood situation in the state from where they source their raw materials has severely destroyed the organic farmsSteel manufacturers increasing the prices of steel bars, as the mines from where they get the iron ore are currently shut owing to a union protest
Using the Expenditure Model (GDP = C + G + I + NX), draw a graph that depicts Demand-Pull inflation.
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