Management Notes

Reference Notes for Management

In Keynesian view, inflation is

In Keynesian view, inflation is

    1. The rise in the price level after the point of full employment
    2. A rise in the price level before the point of full employment
    3. Too much money chasing too few goods
    4. All of the above

Correct Answer: The rise in the price level after the point of full employment

 Answer Explanation

Inflation is indeed manifest as an increase in prices after an economy has reached full employment from a Keynesian perspective. Keynesian interpretation of inflation rests on these tenets:

Demand-Pull Inflation Post Full Employment: When aggregate demand continues to increase after full employment, inflation often occurs under the Keynesian framework. As a result of heightened demand at this time, the economy’s production capacity is almost exhausted, leading to an increase in prices.

Excessive Demand Beyond Full Employment: Keynes argued that companies can raise prices if excessive aggregate demand persists beyond full employment. As resource and labor competition intensifies, wage hikes are a result. As a result, production costs rise, which are then passed on to consumers as higher prices.

The Role of Monetary Policy: Keynesian economics emphasizes the role of monetary policy in exacerbating inflation after full employment. Consumer spending and aggregate demand can be boosted by an expansionary monetary policy, such as lowering interest rates or increasing money supply.

Why the other options are not correct

a. A rise in the price level before the point of full employment:

While Keynesian views recognize that inflation may occur, they differ from them fundamentally. Keynesian economics emphasizes demand-pull inflation, which emerges when full employment approaches or is achieved in an economy.

c. Too Much Money Chasing Too Few Goods:

This summarizes one aspect of inflation, but it offers a simplified explanation of the complex forces driving inflation from a Keynesian perspective. As part of Keynesian theory, supply and demand factors are explored in greater detail.

d. All of the above

Despite the fact that these options capture a variety of aspects of inflation, they fail to provide the nuanced understanding provided by the Keynesian framework. In keynesian economics, demand-pull inflation is studied in detail after full employment, shedding light on the multifaceted dynamics that contribute to inflationary pressures.

Conclusion

According to Keynesian interpretation, inflation is a rise in prices after an economy achieves full employment. This perspective is based on the emphasis on demand-pull factors, excessive demand, and monetary policy. Even though the other options provide some insight into the broader landscape of inflation, they fail to capture the comprehensive and nuanced Keynesian perspective.

To manage inflation and foster economic stability, policymakers and economists need to understand the origins and implications of inflation within the Keynesian framework.

Which of the following is a monetary measure to control inflation in an economy?

Bibisha Shiwakoti

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