Inflation from domestic spending near full employment

Steps:

• Government spending on the hospital boosts aggregate demand (AD).
• High imports of materials cause spending leakage abroad, reducing net domestic AD increase; low imports maximize domestic impact.
• High unemployment signals economic slack with a flat short-run aggregate supply (AS) curve, allowing output growth with minimal price pressure.
• Low unemployment means the economy is near capacity with a steep AS curve, amplifying price effects from AD shifts.

Why D is correct:

• In the AD-AS model, low imports ensure a large AD shift while low unemployment positions the economy on the steep AS portion, where output can't expand much, forcing the biggest price level rise per the Phillips curve trade-off.

Why the others are wrong:

• A: High imports shrink net AD; high unemployment flattens AS for small price rise.
• B: Low imports boost AD, but high unemployment flattens AS, limiting price rise.
• C: Low unemployment steepens AS, but high imports shrink net AD, muting inflation.

Final answer: D