Demand-Pull Inflation from Expansionary Policies

Steps:

• Measures to reduce unemployment, like fiscal or monetary stimulus, boost economic activity.
• This increases aggregate demand as more people spend and firms invest.
• Higher demand pressures prices upward, causing inflation.
• This reflects the short-run Phillips curve trade-off between unemployment and inflation.

Why B is correct:

• Increasing demand creates demand-pull inflation, where excess demand for goods and services raises prices, per the aggregate demand-aggregate supply model.

Why the others are wrong:

• A: Cheap imports lower prices, reducing inflation.
• C: Lower firm costs decrease production expenses, easing inflationary pressures.
• D: Falling wages reduce labor costs, which curbs inflation rather than raising it.

Final answer: B