Income Redistribution and Inflationary Pressures

Steps:

• Income redistribution involves taxing higher earners more and transferring funds to lower earners via welfare or subsidies.
• This policy increases government spending on transfers, boosting aggregate demand in the economy.
• Higher aggregate demand, if supply doesn't keep pace, raises prices according to the aggregate demand-aggregate supply model.
• Thus, the rate of inflation is most likely to increase due to demand-pull effects.

Why D is correct:

• Per the quantity theory of money (MV = PY), increased government spending without matching output growth expands money velocity or supply, driving up the price level (inflation).

Why the others are wrong:

• A: Redistribution reduces work incentives for high earners facing higher taxes, so incentive to work decreases.
• B: High-income groups save more; taxing them lowers overall savings rate.
• C: More even income distribution reduces poverty gaps, decreasing the need for welfare payments.

Final answer: D