Global Recession Reduces Demand and Inflation

Steps:

• Identify inflation as a sustained rise in price levels, often driven by demand-pull or cost-push factors.
• Evaluate each option's impact on aggregate demand or supply in the domestic economy.
• Consider external influences like global events on imports and exports.
• Select the option that decreases overall economic activity, lowering inflationary pressures.

Why C is correct:

• A worldwide recession reduces global demand for exports and lowers import prices due to falling commodity costs, easing demand-pull inflation per the aggregate demand curve shift leftward.

Why the others are wrong:

• A: Devaluation raises import prices, increasing cost-push inflation.
• B: Lower labor productivity raises production costs per unit, fueling cost-push inflation.
• D: Higher direct taxes reduce disposable income and consumption, but increased welfare payments offset this, potentially maintaining or raising aggregate demand.

Final answer: C