What factors can start a cost-push inflation? What must the Fed's response be for the inflation to continue?
What will be an ideal response?
Cost push inflation starts with a decrease in aggregate supply, that is, a leftward shift of the AS curve. The decrease in aggregate supply can be the result of an increase in the money wage rate or an increase in the money price of other raw materials. In either instance firms' costs have risen and they respond by decreasing production, which decreases aggregate supply. The dilemma for the Fed is that the decreases in aggregate supply means that real GDP falls below potential GDP and the price level rises. If the Fed responds by increasing the quantity of money in order to increase aggregate demand and move real GDP back to potential GDP, the price level will rise still higher. And if the initial agent that raised costs responds to the higher price level by again raising its costs, then a cost-push inflation might well occur.
You might also like to view...
Which of the following statements is correct?
a. A decrease in the size of a tax always decreases the tax revenue raised by that tax. b. A decrease in the size of a tax always decreases the deadweight loss of that tax. c. Tax revenue decreases when there is a small decrease in the tax rate and the economy is on the downward-sloping part of the Laffer curve. d. An increase in the size of a tax leads to an increase in the deadweight loss of the tax only if the economy is on the upward-sloping part of the Laffer curve.
Consider the following payoff matrix facing Harry and Sally when each chooses to go to the coffee shop listed. Harry wants to avoid Sally at the coffee shop and is not happy when Sally ends up in the same shop he chooses. Sally would like to see Harry, and so she is not happy when Harry ends up in a different coffee shop. Harry StarbucksDunkin DonutsSally StarbucksH: ?1, S: 1H: 1, S: ?1 Dunkin DonutsH: 1, S: ?1H: ?1, S: 1Given this payoff:
A. both Harry and Sally have dominant strategies. B. Sally has a dominant strategy but Harry does not. C. Harry has a dominant strategy but Sally does not. D. neither Harry nor Sally has a dominant strategy.
When comparing tax and spending policy by the government, in general we note that the tax policy multiplier effect relative to the spending multiplier should be:
A. not comparable. B. equivalent. C. smaller. D. larger.
If consumption and investment spending decline, then state and local government spending is likely to
A. Decline, leading to less economic instability. B. Increase, leading to less economic instability. C. Increase, leading to more economic instability. D. Decline, leading to more economic instability.