To prevent demand-pull inflation
A) real GDP must increase.
B) the Fed must not let the quantity of money persistently rise.
C) firms must refuse to increase wages.
D) the natural unemployment rate must increase.

Question

Quizplus · Accepted Answer

Demand-pull inflation is caused by an increase in aggregate demand that outpaces the economy's ability to produce goods and services. The Fed can prevent this type of inflation by controlling the money supply through tools such as open market operations, adjusting reserve requirements, and changing the discount rate. By limiting the amount of money in circulation, the Fed can slow the growth of aggregate demand and prevent demand-pull inflation. Real GDP increasing or firms refusing to increase wages may help prevent cost-push inflation but not demand-pull inflation. The natural unemployment rate increasing is not a desirable outcome as it represents a greater number of individuals who are unable to find work.

To Prevent Demand-Pull Inflation