Final answer:
A positive shock to spending, according to the inflation parable, typically results in an increase in inflation, as more dollars chase after the limited supply of goods leading to higher prices.
Step-by-step explanation:
According to the inflation parable, a positive shock to spending, which means an increase in spending, typically leads to an increase in inflation. This phenomenon is encapsulated by the phrase Too many dollars chasing too few goods. When consumer spending surges, especially after a period of pent-up demand, such as post-war instances with high government spending and production focused on the war effort, it pushes the aggregate demand curve to the right.
In contrast, when there is a reduction in economic activity and spending declines, inflation tends to reduce, which can even lead to deflation. High levels of government spending during war remove goods from the consumer market, leading to scarcity when the consumers are ready to buy again. Once the constraints, like wartime price controls, are lifted, there is a rapid increase in spending, which drives prices up, and hence, inflation increases.