Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A rise in consumer confidence leads to increased spending, causing firms to raise prices and anticipate higher future costs.
B
A decrease in government spending results in lower demand for goods and services, leading to deflationary pressures.
C
Increased unemployment results in lower wage demands, keeping inflationary expectations stable despite rising demand.
D
A significant drop in interest rates leads to increased borrowing and spending without affecting inflation.
Understanding the Answer
Let's break down why this is correct
Answer
During an economic recovery, when people and businesses start spending more money, this is known as increased aggregate demand. As demand for goods and services rises, businesses may struggle to keep up, leading to higher prices, which is inflation. When inflation expectations increase, lenders may want to charge higher interest rates to protect their money's value, resulting in higher real interest rates. For example, if a company wants to borrow money to expand its operations due to rising demand, it might face higher interest rates because banks expect prices to go up. This shows how increased demand can influence both inflation and interest rates during a recovery.
Detailed Explanation
When people feel good about the economy, they spend more money. Other options are incorrect because This option suggests that less government spending lowers demand, which can lead to falling prices; This choice says that high unemployment keeps wages low, which keeps prices stable.
Key Concepts
Economic Recovery
Aggregate Demand and Supply
Inflationary Expectations
Topic
Economic Recovery and Supply Shifts
Difficulty
medium level question
Cognitive Level
understand
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