Government Spending Boosts Aggregate Demand

Steps:

• Identify inflation as a sustained rise in the general price level.
• Recall that demand-pull inflation occurs when aggregate demand exceeds aggregate supply.
• Evaluate each option's impact on aggregate demand or supply.
• Select the option that directly increases aggregate demand.

Why C is correct:

• A rise in government spending increases aggregate demand (AD = C + I + G + (X - M)), shifting the AD curve rightward and causing demand-pull inflation per the AD-AS model.

Why the others are wrong:

• A: A fall in import prices reduces cost-push pressures, lowering inflation.
• B: A fall in wage rates decreases production costs, reducing inflationary pressures.
• D: A rise in unemployment signals weaker demand, potentially causing deflationary gaps.

Final answer: C