Final Answer:
Long run, total spending only influences is C. Inflation.
Step-by-step explanation:
In the long run, total spending only influences inflation. This is because in the long run, the economy tends to operate at its potential output level, and any increase in total spending will lead to higher demand for goods and services. When demand exceeds supply, prices tend to rise, leading to inflation. Therefore, total spending primarily affects the general price level in the economy rather than actual output or productive capacity.
Total spending’s impact on inflation can be explained using the quantity theory of money equation: MV = PQ. In this equation, M represents the money supply, V represents the velocity of money, P represents the price level, and Q represents real output. When total spending increases (represented by MV), it leads to an increase in the price level (P) if the real output (Q) remains constant. This demonstrates how total spending influences inflation in the long run.
Additionally, total spending can also affect inflation through its impact on aggregate demand. An increase in total spending leads to higher aggregate demand, which can result in demand-pull inflation as producers raise prices to meet the increased demand. Therefore, in the long run, total spending primarily influences inflation through its impact on aggregate demand and the general price level in the economy.
Correct option is C. Inflation.