2. On May 11th, the Bureau of Labor Statistics reported an 8.5% increase in their measure of inflation from the previous year. This was one in a series of above trend inflation reports, and above the Federal Reserve 2% target for inflation. a) Identify and explain two costs of inflation. Which of these two do you think is more important in the United States and why? b) According to the Quantity Theory of Money, what is the cause of a rise in inflation? c) Draw a chart that shows the demand and supply of money in equilibrium. Provide some commentary as to why both the supply and demand curves have the slopes that they have. d) Now assume that the Federal Reserve determines that the Price level is too high, and they wish to reduce it. a. What action might the Fed undertake to address a Price level that is too high. Tov b. How does this action impact the equilibrium you have plotted in part (c)? C. Describe how a new equilibrium is established (if it is).
