Milovia is a small open economy. The general price level in the economy has been increasing at a rate of about 7.5 percent each year. Jane Wilson, an industry analyst, is of the opinion that such high inflation is adversely affecting aggregate demand in the economy and therefore its ability to grow. Her colleague, Harry Gomes, however, disagrees. According to Harry, some amount of inflation is unavoidable in a growing economy. Higher prices for products help to increase the level of corporate profits and induce firms to increase aggregate output. Which of the following, if true, will indicate that higher prices will not induce firms to increase output? A. The Milovian government offers subsidies on inputs used in many manufacturing industries. B. The government purchased bonds in an open market operation last year. C. In spite of rising inflation, people in Milovia expect real incomes to increase substantially in the next few years. D. The country's trade balance has been positive for the last five years. E. The increase in the price of inputs outweighed the increase in the price of the final product.
