Discussion
If the economy is operating at potential GDP, an increase in money supply will lead to
Answer: C
When the economy is already at potential GDP, an increase in the money supply raises aggregate demand but cannot raise output, so the extra demand pulls up prices. That is demand-side (demand-pull) inflation.
Stagflation needs falling output together with rising prices, which does not follow from a monetary expansion. Structural inflation arises from rigidities in the supply structure, and supply-side inflation from rising costs, neither of which is the effect of more money chasing the same goods.
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