Answer to Question #36465 in Macroeconomics for Tasia

Question

Given the following information:
Consumers are very optimistic about the future.
The price of oil has just doubled.
The money supply is growing at a 6% rate.
The government has just cut spending by 8%. Firms are doubling their investment.
The trade deficit has doubled in the last 6 months.
Calculate the long-run rate of inflation.

Answer 1

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.
Economists generally agree that in the long run, inflation is caused by increases in the money supply.
So, in our case long-run inflation will be 6% per year.