Question:
When an economy is at full employment which of the following will most likely create demand-pull inflation in the short run?
(1) An increase in the policy interest rates
(2) An increase in personal income taxes
(3) A decrease in the real rate of interest
(4) A decrease in government spending
(5) A decrease in the money supply
Correct Answer:
(3)
Answer Explanation:
Demand-pull inflation occurs when Aggregate Demand (AD) shifts to the right, pushing the economy past full employment. A decrease in the real rate of interest makes borrowing cheaper and saving less attractive. This stimulates both household consumption and business investment, shifting AD to the right and pulling prices up.
Topic: Inflation Year: 2019
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