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Chapter 28: Problem 12

When Robert Shiller asked a sample of the general public what they thought caused inflation, the most frequent answer he received was "corporate greed." Do you agree that greed causes inflation? Briefly explain.

Short Answer

Expert verified
Though 'corporate greed' might contribute to inflation on a smaller scale by causing price increases for specific goods, it cannot be considered a primary cause. Inflation is a complex macroeconomic issue that often arises from factors such as increased money supply, demand-pull or cost-push scenarios, usually controlled by governmental policy or central banking systems.

Step by step solution

01

- Understand Inflation

Inflation refers to the rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling. When inflation occurs, each unit of currency buys fewer goods and services.
02

- Traditional Causes of Inflation

Inflation is typically caused by an increase in the money supply, demand-pull inflation, or cost-push inflation. Demand-pull inflation is when demand for goods and services exceeds production due to economic growth. Cost-push inflation refers to the decrease in aggregate supply (potential output) due to rising wages or raw material costs.
03

- Greed and Inflation

'Corporate greed', which can be interpreted as companies constantly striving for higher profits and thus raising prices, can cause inflation in a microeconomic context. However, it would be an oversimplification to assume 'corporate greed' as the sole or primary cause of inflation. Central banks and government policies are a more direct cause of inflation, for instance, by supply of more money into the economy.

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Most popular questions from this chapter

Why did Robert Lucas and Thomas Sargent argue that the Phillips curve might be vertical in the short run? What difference would it make for monetary policy if they were right?

A 2017 column in the Wall Street Journal noted that "longterm consumer inflation expectations [are] at record lows." If inflation turns out to be higher than households and firms had previously expected, will the actual real wage end up being higher or lower than the expected real wage? Will employment in the short run end up being higher or lower? Briefly explain.

Lael Brainard, a member of the Federal Reserve's Board of Governors, delivered a speech in 2017 that included this observation: "At a time when the unemployment rate has fallen from 8.2 percent to 4.4 percent, core inflation has undershot our 2 percent target for 58 straight months. In other words, the Phillips curve appears to be flatter today than it was previously." Briefly explain why the data Brainard cites indicate that the Phillips curve in 2017 was relatively flat.

What actions should the Fed take if it wants to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation?

An article in the Economist observed that "a sudden unanticipated spurt of inflation could lead to rapid economic growth." a. Briefly explain the reasoning behind this statement. b. Does it matter whether a spurt of inflation is unanticipated? Might different economists provide different answers to this question? Briefly explain.
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