Vincent Hartnett, Jr., president of Penske Logistics, is confused. Federal Reserve officials have been expressing concerns about a perceived threat of "deflation." In Hartnett's view, cost-push sources of inflationary pressures abound. Hartnett has watched his firm's health care costs jump, including a 9 percent increase within the past year. Fuel costs continue to escalate, and market wages required to retain workers have risen. In response to these cost increases, his firm and others throughout the nation are producing fewer goods and services at any given price level. The implication, at least as far as Hartnett can discern, is that inflation is likely to increase, and he continues to see a steady upward creep in the annual U.S. inflation rate in monthly government reports.

The fact that Fed officials keep fretting about a potential decline in the price level has made Hartnett concerned that the Fed may unexpectedly increase the quantity of money in circulation to try to raise aggregate demand. Such an action, Hartnett worries, would essentially produce an aggregate demand shock that would lead to a higher rate of inflation.

1. How would "cost-push pressures" that Hartnett perceives raise the price level?

2. Why would an unexpected increase in the quantity of money generate inflation?

Answer rating: 100% (QA)

Costpush pressures as perceived by Hartnett raise the price level by increasing the production ... View the full answer