21 26 inflation a monetary phenomenon this conclusion

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21-26 Inflation: A Monetary Phenomenon This conclusion reflects both: 1. The classical dichotomy, and 2. The long-run neutrality of money. This is true even if wages and prices are very sticky in the short-run. 21-27 Causes of Inflationary Monetary Policy If central banks can target any inflation rate in the long-run, why are their periods of time when inflation is unacceptably high? Generally because the government has pursued a high employment goal. 21-28 Causes of Inflationary Monetary Policy Two types of inflation can result from policies designed to promote high employment. Cost-push inflation results from temporary negative supply shocks, including wage increases beyond what productivity gains would justify. Demand-pull inflation results from aggregate demand policies that attempt to maintain economic output above potential output.
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8 21-29 Cost-Push Inflation Suppose the economy is initially in general equilibrium with inflation at its target rate. But now there is a negative short-run aggregate supply shock while the government is committed to maintaining a high level of employment. 21-30 Cost-Push Inflation Y π Y P AD 0 π 0 LRAS 0 SRAS 0 ( π e = π 0 ) 21-31 Cost-Push Inflation In the long-run: 1. Economic output is at its potential level. 2. The unemployment rate is at the natural rate. 3. The real interest rate is at its equilibrium level. 4. Inflation is permanently higher. 21-32 Demand-Pull Inflation Suppose the economy is initially in general equilibrium with inflation at its target rate. But now the government wants to increase employment to an even higher level.
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9 21-33 Demand-Pull Inflation Y π Y P AD 0 π 0 LRAS 0 SRAS 0 ( π e = π 0 ) 21-34 Demand-Pull Inflation In the long-run: 1. Economic output is at its potential level. 2. The unemployment rate is it the natural rate. 3. The real interest rate is at its equilibrium level. 4. Inflation is permanently higher. 21-35 Demand-Pull/Cost-Push Inflation 21-36 Demand-Pull/Cost-Push Inflation
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