Workshop_3_HW_Problems_and_Answers

Workshop_3_HW_Problems_and_Answers - Workshop 3 HW Problems...

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Workshop 3 HW Problems and Answers 1 1. Some Classical and Monetarist economists claim that inflation is always a “monetary phenomenon.” What do they mean by this claim and are they correct? This claim points to the result that an on-going inflation requires the central bank to constantly increase the quantity of money. In the absence of continual monetary growth, the price level might rise but it would eventually stabilize. The price level will continue to rise, which means that on-going inflation will occur, only if the Federal Reserve constantly increases the quantity of money. Because inflation requires constant growth in the quantity of money, inflation can be thought of as a “monetary phenomenon.” 1 2. How can a higher price of oil create inflation? By itself a higher price of oil cannot create inflation. Taken by itself a higher price of oil can lead to a higher price level but after the adjustment is made to the higher price of oil, the price level stops rising—that is, inflation stops. A higher price of oil can lead to inflation only if the central bank “ratifies” it by increasing the quantity of money. If the central bank, the Federal Reserve in the United States, responds to the decrease in real
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Workshop_3_HW_Problems_and_Answers - Workshop 3 HW Problems...

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