1. Quantitative tightening occurs when the A) Fed sells long-term securities. B) Fed buys long-term securities. C) government lowers income and other taxes. D) government raises income and other taxes   2. In the New Keynesian model, a short run effect of The Fed buying bonds in the open market is A) an increase in the money supply B) a decrease in the money supply C) lower unemployment D) none of the above E) a&c

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Inflation and Purchasing Power Theory

In economic terms, Inflation refers to the increase in the costs of various commodities which are used in daily lifestyle like food, clothes, transport, etc. over a specific time. It may lead to a fall in the purchasing power of the people and also affects the exchange rate of the currency because of the price increase. As the purchasing power falls the unit of the currency in the economy falls. When the prices of the commodities are decreased, then the purchasing power of the consumers will rise, then it will lead to deflation and changes the currency of the base economy to that of the foreign economy which will lead to change in exchange rates.