One-shot and continued inflation This graph shows and economy undergoing infiati

Question

One-shot and continued inflation This graph shows and economy undergoing infiation. The initial state of the economy is represented by point A. Suppose that the economy moves from point A to point B and then back to point a. It then remains permanently at point A. This is a case of that the economy moves from point A to point B because of increases in costs of production. Assume that prices will rise periodically. The decides to intervene and continually increase the money supply in an attempt to stabilize the economy. to monetarists, what is the likely outcome of the central bank's intervention? Supply-side-induced one-shot inflation Continued inflation Deflation Demand-side -induced one-shot inflation

Explanation / Answer

1) If the economy moves from point A to Point B and then back to point A. It then remains permanently at point A, This is a case of Supply side induced one-shot inflation.

Supply side induced one-shot inflation: When the short run aggregate supply curve shifts from SRAS1 to SRAS2 the price moved from point A to point B. At point B the real GDP of the economy is less than the natural Real GDP. Also the unemployment rate is greater than the natural unemployment rate. This will leads to fall in wage rate and brings back the short run aggregate Curve from SRAS2 to SRAS1.

So answer is Supply-side-induced one-shot inflation

2) If economy moves from point A to point B because of cost of production and the price rise is periodically, then Fed intervene and continuously increase money supply then the outcome will be continued inflation, as price will rise continuously with rise in money supply with increase in Aggregate demand curve.

So Answer is Continued Inflation.

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