Which combination describes the inflation outlook described with unemployment being low?

• A. Inflation is expected to rise as unemployment remains low.
• B. Deflation is expected as unemployment rises.
• C. Inflation is expected to fall due to low demand.
• D. Deflation is expected because money supply tightens.

Answer: (A)

Low unemployment signals a tight labor market. When many people are employed, wages tend to rise as firms compete for workers. Higher wages increase household purchasing power and can push up overall demand, while also raising firms’ costs; to maintain profit margins, many businesses raise prices. This combination—strong demand with rising costs—tends to lift inflation.

So the described outlook is that inflation is likely to rise as unemployment remains low. The other statements imply deflation or weaker inflation due to weak demand or restrictive monetary policy, which doesn’t align with a tight labor market and the typical inflationary pressures that come with it.