Answered: General price level P₁ AD₁ Y₂ Total…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter22: Inflation

Section: Chapter Questions

Problem 24CTQ: Why is the GDP deflator not an accurate measure of inflation as it impacts a household?

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Question

“The U.S. money supply is shrinking for the first time since 1949, as savings deposits decline and
the Federal Reserve shrinks its $8 trillion balance sheet. The drop stems mostly from changes in
Fed policy and rising interest rates.”

Adapted from:
https://www.goldmansachs.com/insights/articles/why-the-us-money-supply-is-shrinking
Accessed on 4 October 2024

1.2 Which type of inflation is most likely to reduce given the shrinking money supply.
Substantiate your answer using the one most relevant diagram from below.

General price level
P₁
AD₁
Y₂
Total production, income
DIAGRAM A
AD
AS
AD
AD
Price level
קע
SRAS2
SRAS₁
Real national income (GDP)
DIAGRAM B
AD

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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