Question

Choose the true statement.

Inflation strengthens the effect of the multiplier.

Cost push inflation is associated with economic expansions.

Demand pull inflation will cause a recession.

Inflation weakens the effect of the multiplier.

Answer 1

Answer: 1^st option

Multiplier = M

Marginal propensity to save = MS

Therefore,

M = 1 / MS

As the inflation occurs, savings would be low; this reduces MS – the denominator of M. Since the denominator decreases, the multiplier would be high – strengthen the effect.

Other options are not true:

2^nd option: cost push means the increase in input cost. It shifts the aggregate supply to the left for increasing the price level; therefore, this doesn’t happen because of expansion.

3^rd option: demand pull means the shift of aggregate demand curve to the right, making the price level up (inflation). This is expansion but not recession.

4^th option: as the 1^st option is true, the 4^th option can’t be true.