g Suppose that the economy is producing at its potential level of output and full employment. An economic stimulus which includes increases in government spending will ____________. Select the correct answer below: cause stagflation raise inflationary pressures cause a permanent increase in output not have any effect, as the economy is already at maximum productione

Suppose that the economy is producing at its potential level of output and full employment. An economic stimulus which includes increases in government spending will ____________.

raise inflationary pressures.

Explanation:

Inflationary pressures increase when an economy has reached its full employment and potential GDP levels with the introduction of some economic stimulus, through increased government spending, for example. This situation will cause demand and prices to increase. The money available will be too much for the goods available. While producers try to increase production, they cannot exceed their capacity since they have already attained full capacity.