Which of the following is likely to happen if the government attempts to maintain full employment during a period of cost-push inflation by increasing aggregate demand?

Question

Multiple choice question.

The aggregate demand curve will shift to the left.

the inflation rate will become negative.

The inflation rate will increase further.

The unemployment rate will rise further.

Answer 1

If the government attempts to maintain full employment during a period of cost-push inflation by increasing aggregate demand, the most likely outcome is:

The inflation rate will increase further.

Cost-push inflation occurs when the costs of production rise, leading to higher prices for goods and services. Increasing aggregate demand in this context can exacerbate inflation, rather than help stabilize employment, as it may lead to even higher prices without necessarily reducing unemployment.