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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

If a nation has high and persistent inflation, the most likely explanation is

a. the central bank creating excessive amounts of money.

b. unions bargaining for excessively high wages.

c. the government imposing excessive levels of taxation.

d. firms using their monopoly power to enforce excessive price hikes.

To determine
Inflation and money supply.

Explanation

Option (a):

When the central bank is creating excessive amounts of money, the nation will face high and persistent inflation. When the central bank is creating excessive amount of money, then the supply of money is more than the level of output produced in the economy. When there is an increase in the money supply we notice a fall in value of money and a rise in the price level. Ultimately this leads to high and persistent inflation. Thus the option ‘a’ is correct.

Option (b):

According to the marginal wage theory, the wage of an employee is equal to his marginal productivity. When the union is bargaining for excessively high wages and achieves it then employee would increase the productivity in order to avoid layoff. Thus, the real increase in price would be less...

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