Some economists argue that it is easier to resolve demand-pull inflation than it is cost-push inflation. Use the aggregate demand and aggregate supply model to explain this assertion.
What will be an ideal response?
By shifting aggregate demand leftward when the equilibrium occurs in the intermediate or classical range, the inflation rate should fall. This assumes that the price-level increase was due to demand factors only. It is possible to decrease aggregate demand by using tax policies which decrease consumer or business spending, or by using monetary policies which tighten the availability of credit for spending.
However, the factors which cause leftward shifts in the aggregate supply schedule (see Figure 29.6) are not as easy for government policy to control. Government cannot quickly change worker demands for higher wages; it cannot quickly increase productivity which would also bring down production costs; it cannot control the price of imported resources. These three factors have contributed much to cost-push inflation in the past, and help to illustrate the difficulty in controlling cost-push inflation.
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Workers in country A receive an increase in wages of 10 percent at the same time the inflation rate in country A is 8 percent. Workers in country B receive an increase in wages of 3 percent and the inflation rate in country B is 1 percent. In which country are workers better off?
A. Country A because their real wages rise by 18 percent. B. Country A because their real wages rise by 10 percent. C. Country B because the inflation rate is lower. D. Neither country because the increase in real wages is the same.
The optimal bid for an individual participating in a first-price, sealed-bid auction with independent private values is to bid:
A. less than the individual's valuation of the item. B. There is not an optimal bid strategy for all individuals when independent private values exist. C. exactly the individual's valuation of the item. D. more than the individual's valuation of the item.