CHAPTER 28 MONEY GROWTH AND INFLATION 641 QUICK QUIZ: The government of a country increases the growth rate of the money supply from 5 percent per year to 50 percent per year. What happens to prices? What happens to nominal interest rates? Why might the government be doing this? THE COSTS OF INFLATION In the late 1970s, when the U.S. inflation rate reached about 10 percent per year, in-flation dominated debates over economic policy. And even though inflation was low during the 1990s, inflation remained a closely watched macroeconomic vari-able. One 1996 study found that inflation was the economic term mentioned most often in U.S. newspapers (far ahead of second-place finisher unemployment and third-place finisher productivity ). Inflation is closely watched and widely discussed because it is thought to be a serious economic problem. But is that true? And if so, why? A FALL IN PURCHASING POWER? THE INFLATION FALLACY If you ask the typical person why inflation is bad, he will tell you that the answer
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