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Chapter 14: Problem 10

"One-shot inflation may be a demand-side (of the economy) or a supply-side phenomenon, but continued inflation is likely to be a demand-side phenomenon." Do you agree or disagree with this statement? Explain your answer.

Short Answer

Expert verified
The statement is largely correct. While one-shot inflation may be caused by either demand-side (increase in consumer spending) or supply-side (increase in production costs) factors, sustained or continued inflation is more likely to result from ongoing demand-side factors (sustained increase in demand for goods and services).

Step by step solution

01

Understanding Demand-Side and Supply-Side Theories

In economics, demand-side refers to the theory that economic stimulation mainly comes from improving the demand for goods. In contrast, supply-side economics argues that production, or supply, is the key to economic prosperity and that consumption, or demand, is merely a secondary consequence.
02

One-Shot Inflation

Inflation is generally a phenomenon where prices for goods and services rise, diminishing purchasing power. One-shot inflation can happen due to various factors such as an increase in production costs (supply-side) or an increase in consumer spending (demand-side). So, one-shot inflation can indeed be either a demand-side or supply-side phenomenon.
03

Continued Inflation

For inflation to continue, there is a need for a sustained increase in the demand for goods and services. That is primarily a demand-side phenomenon. An increase in demand without a corresponding increase in supply often leads to higher prices, hence inflation. So, the statement is correct to assert that continued inflation is likely a demand-side phenomenon.

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Most popular questions from this chapter

In monetarism, how will each of the following affect the price level in the short run? a. An increase in velocity b. A decrease in velocity c. An increase in the money supply d. A decrease in the money supply

Suppose the money supply rises. Is the interest rate guaranteed to decline initially? Why or why not?

In an equation-of-exchange framework, the price level is dependent upon the money supply, velocity, and Real GDP. Do you agree or disagree? Explain your answer.

Suppose the objective of the Fed is to increase Real GDP. To this end, it increases the money supply. Can anything offset the increase in the money supply so that Real GDP does not rise? Explain your answer.

According to monetarism, an increase in the money supply will lead to a rise in Real GDP in the long run. Do you agree or disagree with this statement? Explain your answer.
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