📚 Learning Guide
Full Employment Equilibrium
hard

In the context of Keynesian economics, what is the impact of inflation on achieving full employment equilibrium?

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Choose the Best Answer

A

Inflation has no effect on full employment equilibrium

B

Higher inflation leads to lower unemployment in the short run

C

Full employment equilibrium is only achieved with zero inflation

D

Inflation always results in increased unemployment

Understanding the Answer

Let's break down why this is correct

Answer

In Keynesian economics, full employment equilibrium occurs when all resources, especially labor, are used efficiently, and everyone who wants a job can find one. Inflation can impact this by making goods and services more expensive, which may reduce consumer spending. When people spend less, businesses might earn less revenue, leading them to cut back on hiring or even lay off workers, which can push the economy away from full employment. For example, if the prices of basic necessities like food and gas rise significantly, families might have less money to spend on other items, causing businesses to slow down. Therefore, while some inflation can be normal in a growing economy, high inflation can hinder the goal of full employment by creating uncertainty and reducing demand.

Detailed Explanation

Higher inflation can lead to lower unemployment in the short run. Other options are incorrect because Some might think inflation doesn't change employment levels; It's a common belief that no inflation means full employment.

Key Concepts

Keynesian economics
inflation
economic equilibrium.
Topic

Full Employment Equilibrium

Difficulty

hard level question

Cognitive Level

understand

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