Which of the following changes will necessarily cause inflation?

• A. An increase in the money supply without a corresponding increase in output
• B. A decrease in consumer spending
• C. A rise in productivity across all sectors
• D. A reduction in government spending

Answer: (A)

Verified step by step guidance

1. Understand the concept of inflation: Inflation is the general increase in prices across the economy, often caused by demand outpacing supply or by increases in the money supply.
2. Analyze the effect of an increase in the money supply without a corresponding increase in output: When more money chases the same amount of goods and services, prices tend to rise, causing inflation.
3. Consider the impact of a decrease in consumer spending: Lower consumer spending typically reduces demand, which tends to lower or stabilize prices rather than cause inflation.
4. Evaluate the effect of a rise in productivity across all sectors: Increased productivity means more goods and services are produced efficiently, which usually puts downward pressure on prices, reducing inflationary pressures.
5. Assess the impact of a reduction in government spending: Lower government spending reduces overall demand in the economy, which generally decreases inflationary pressures rather than causing inflation.