Chapter 17, Problem 18AA

To determine

To discuss: The causes of cost-push inflation.

Explanation of Solution

According to the monetarist, Fed should avoid managing ups and downs in the economy. They should instead follow a ‘monetary rule’.

Monetary rule refers to the allowing the growth of money supply at an annual consistent rate (most probably 3-5%) instead of applying monetary policy to slow down the economy. This will help provide the businesses and consumers with certainty in future.