There have been two important explanations for the current rate of inflation (): A Supply Shock and a Demand Shock. President Biden has in a recent speech said What people dont know is that 70 percent of the increase in inflation was the consequence of Putins price hike because of the impact on oil prices. Seventy percent. President Biden, remarks at the North Carolina Agricultural and Technical State University in Greensboro, N.C., April 14. President Biden has also blamed the Supply Chain issue and Covid-19 as causes for the current inflation.

These statements are consistent with a Supply Shock as the cause for inflation. Using AD/AS graphical analysis with inflation () measure on the vertical axis and real production (real GDP) on the horizontal axis explain what a Supply Shock is as a cause of inflation.

Then explain in detail how the Federal Reserves monetary policy can be used to reduce inflationary forces and inflation itself. What will be the effect on real production (Real GDP)?

e. Another argument for inflation is from a Demand Shock. This argument is based on the quantity theory of money and Milton Friedmans statement above. The Demand Shock argument is based on the Fed policy of quantitative easing and, more recently, the Covid-19 relief program in both the Trump and Biden administrations. These relief programs came in the form of fiscal policy financed by the Federal Reserve purchasing treasury securities by printing money (monetization of Treasury debt).

Using AD/AS graphical analysis explain what a demand shock is and how the recent monetary and fiscal policies caused inflation. Then explain in detail how the Federal Reserves monetary policy can be used to reduce inflationary forces and inflation itself. What is the effect of this monetary policy on real production (Real GDP)?

f. Which explanation do you believe is the cause for the current inflation? Explain why.