Question

The rate of inflation during the past year was 3%. If firms expect higher demand for their products, you expect inflation during the coming year to be____ than during the past year because______

O higher; firms are producing less than potential
O lower; firms are producing more than potential
O higher; firms are producing more than potential
O lower; firms are producing less than potential

Answer 1

Inflation tends to be higher when firms are producing more than their potential capacity.

Step-by-step explanation:

Inflation tends to be higher when firms are producing more than their potential capacity.

This is because when firms expect higher demand for their products, they may increase production to meet that demand. As a result, there is increased spending and a higher demand for resources, which can lead to higher prices and inflation.

Therefore, in the given scenario where firms expect higher demand for their products, we would expect inflation during the coming year to be higher than during the past year because firms are producing more than potential.