"economics"exercise:Understanding Business Cycles

A is correct. Demand–pull inflation depends upon the relationship between actual and potential GDP and industrial capacity utilization. The higher the rate of capacity utilization or the closer actual GDP is to potential, the more likely an economy will suffer shortages, bottlenecks, and a general inability to satisfy demand, and hence, price increases.

B is incorrect because stagflation occurs with a high level of unemployment and a slowdown in the economy, accompanied by high inflation: clearly not conditions of high capacity utilization.

C is incorrect because cost–push inflation is kicked off by either an increase in the money wage rate or an increase in the money prices of raw materials