When (if at all) are budget deficits inflationary?
A)When AS is perfectly horizontal
B)When AS has a very steep slope
C)When AS has a downward slope
D)When AS intersects AD

Question

Quizplus · Accepted Answer

Budget deficits can be inflationary when the Aggregate Supply (AS) curve has a very steep slope. This is because, in such a situation, increases in aggregate demand (such as those potentially caused by government spending financed through deficits) are more likely to lead to increases in prices rather than increases in output, thus leading to inflation.

When (If at All) Are Budget Deficits Inflationary