Indicate whether you think the following statements are true, false or uncertain. Support your answer by giving all necessary reasoning and calculations:
b) According to the quantity theory of money, “inflation is always and everywhere a monetary phenomenon.”
According to the quantity theory of money, “inflation is always and everywhere a monetary phenomenon.”
Friedman's work busted the classic Keynesian dichotomy on inflation, which asserted that prices rose from either "cost-push" or "demand-pull" sources. It also put monetary policy on the same level as fiscal policy.
Inflation refers to the rate at which the overall prices of goods and services rises resulting in the decrease in the purchasing power of the common man, which can be measured through Consumer Price Index. Modern analysis of inflation revealed that it is mainly caused either by demand side or supply side or both the factors. Demand side factors result in demand-pull inflation while supply side factors lead to cost-push inflation.
Definition of Demand-Pull Inflation
Demand Pull Inflation arises when the aggregate demand goes up rapidly than the aggregate supply in an economy. In simple terms, it is a type of inflation which occurs when aggregate demand for products and services outruns aggregate supply due to monetary factors and/or real factors.
Out of these six factors, the first four factors, will result in the rise in the level of disposable income. The increase in aggregate income result in the increase in aggregate demand for goods and services, causing demand-pull inflation.
Definition of Cost-Push Inflation
Cost push inflation means the increase in the general price level caused by the rise in prices of the factors of production, due to the shortage of inputs i.e. labour, raw material, capital, etc. It results in the decrease in the supply of outputs which mainly use these inputs. So, the rise in prices of the goods emerges from the supply side.
Moreover, cost-push inflation may also be caused by depletion of natural resources, monopoly and so on. There are three kinds of cost-push inflation:
Indicate whether you think the following statements are true, false or uncertain. Support your answer by...
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