Question: Question 2 The US inflation rate has risen to 6.8% in 2021 when the country is still embroiled in the Covid-19 pandemic. This is intriguing

Question 2

The US inflation rate has risen to 6.8% in 2021 when the country is still embroiled in the Covid-19 pandemic. This is intriguing as the US economy had just underwent a 3.5% drop in GDP for 2020.

A) Using the AD-AS model, explain as detail as possible what are the causes of the US inflation. Your explanations should be accompanied by relevant diagram(s).

(Note: Please use autodraw.com to draw the graph. It can be accessed here. Instructions to use autodraw.com is available here.)

B) If you are the policy-makers, suggest how should you manage the inflation, given that the economy is still on a weak recovery from the effects of Covid-19 pandemic.

C) What are the differences between Baumol-Tobin and Keynes Liquidity Preference Theory in explaining the demand for money?

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