Question

What causes inflation? In almost all cases of large and persistent inflation, the culprit is the growth in the I-10. Principle 10: Society Faces Short Run Trade Off Between Inflation and Unemployment Policymakers can exploit the short-run trade-off between inflation and using various policy instruments. 1-11. The production possibility frontier shows the combinations of output that the economy can possibly produce It shows the of one good as measured in terms of the other good. 1-12. The farmer gets better off through trade with the rancher. With the opportunity of trade, farmer had better produceounces of potatoes ounces ounces ounce ounces and ounces of meat. 1-13. Through trade, the farmer exchange his ounces of potatoes for the rancher's 5 ounces of meat. Then, finally he can consume ounces of potatoes and 5 ounces of meat. Before the trade, the fam The proposed trade between the farmer and the rancher offers each of them a Figure In conclusion, through trade the combination of meat and potatoes that would be impossible in the farmer becomes to more consumethe rancher gets to consune at point B ather than ie inlto w in pd teo both potatoes and meats than those consumed before the trade. absence of trade. How Trade Expands the Set of Consumption Opportunities consume more meat and more potatoes (a) The Farmer's Production and Consumption gets better off Meat (ounces) Meat (ounces) 18 Potatoes (ounces) Potatoes (ounces) (c) The Gains from Trade: A Summary Meat Potatoes Meat Potatoes Without Trade: Production and Consumption 12 or With Trade: 12 or 17 ot +1 or 12 or 27 oz +3 o Gets 5 or Gives 15 Gives 5 or Gets 1S o GAINS FROM TRADE: +1 or

Answer 1

9.

The significant and persistent cause of inflation is growth in Supply of money. If the policymaker to boost demand keeps increasing the supply of money, the amount of money does not match with the productive capacity of the economy. This is called too much money chasing too few goods. If the number of products produced by an economy is limited, increasing the money supply will decrease the value of money. Then every unit of good will cost higher currency amount. That is the price of the good will rise in money terms and so does the inflation.

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10.

There exists a negative relationship between unemployment and inflation in the short run as suggested by the Phillips curve. This trade-off often exploited by the policy maker to either target for higher inflation to get lower unemployment or lower inflation at the cost of the high unemployment rate in the short run.

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11.

The production possibility curve is the locus of all such points which an economy can produce using all its resources efficiently. Then any point on the PPF is efficient production points, and any point beyond PPF is through welfare improving, not attainable given the productive capacity of the economy. The slope of the PPF at any point on the PPF is the opportunity cost of producing one good for another. A country said to increase its gains from trade if it produces and sell a good it has a lower opportunity cost. This is called the theory of comparative advantage.

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12.

The opportunity cost is the slope of PPF. The slope of farmers PPF is 0.25 ounces of meat for each ounce of potato. For the rancher, this is 1/2 ounce of meat for each ounce of potato. (the slope of any line is its perpendicular by its base, the slope of farmers PPF is 8/24=0.25)

In this case, the farmer has a lower opportunity cost of producing a potato. Then with the trade, the farmer should produce the only potato. The production of potato and meat by the farmer must be 32 ounces of potato and zero ounces of meat.

After the trade, the farmer should exchange 15 ounces of potato for 5 ounces of meat and consume 17 ounces of potato and 5 ounces of meat.