Inflation in a developed country usually sets in
-
- Before the point of full employment
- After the point of full employment
- at the point full employment
- None of the above
Correct Answer: After the point of full employment
Answer Explanation
Inflation in a developed country sets in after the point of full employment. Once full employment has been reached in a developed country, inflation is more likely to occur. In full employment, all resources are utilized and the unemployment rate is at its natural rate, which includes frictional and structural unemployment. An economy with full employment experiences a higher demand for goods and services.
As demand for goods and services increases, businesses often struggle to meet this demand with their existing resources and workforce, increasing wages and production costs.
Why the other options are not correct
a. Before the Point of Full Employment:
There are several reasons why inflation is less likely in a developed country before full employment. One of them is the presence of spare capacity. Until full employment is reached, there are still unemployed or underemployed resources that can be utilized to meet growing demands.
When businesses tap into this reserve of resources, they can expand production without facing significant upward pressure on wages and production costs. This usually prevents rapid inflation from occurring before full employment is reached.
c. At the point of full employment:
In a developed country, inflation is unlikely to occur at full employment as well. At this point, the economy is operating at its maximum capacity, and there is no spare capacity. Despite the high demand for goods and services, businesses are already utilizing their resources to their fullest extent. Thus, further expansion of production is limited without causing significant increase in costs.
Therefore, prices and wages remain relatively stable, reducing the likelihood of rapid inflation occurring precisely at full employment.
d. None of the Above:
This option is incorrect because, as explained above, inflation is more likely to set in after full employment than before or precisely at that point. As a result of demand exceeding the productive capacity of an economy, developed economies experience inflationary pressures.
Conclusion
As a result, in developed countries, inflation occurs closely associated with full employment. Due to spare capacity, inflation is less likely to occur before full employment, but more likely once full employment has been achieved. As the demand for goods and services increases, businesses face challenges in meeting this demand with their existing resources, resulting in an increase in wages and production costs.
Understanding the relationship between inflation and full employment is critical for policymakers to implement effective monetary and fiscal policies that maintain price stability while promoting economic growth.
When both prices and money income fall, the situation is called
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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