Question

19. If the Fed uses open market operations to lower federal funds rate this generally will leads to a higher price level in the short run (why?) or, in other words, inflation. What kind of inflation is this?

a. cost push
b. demand-pull

c. it depends on the reason the Fed lowered rates

d. neither

20. Suppose that disruptions in the oil supply chain cause the price of imported oil to raise. Oil, as you probably know, is an important input into many goods and services. If the increase in the price of oil lead firms to charge higher prices, this inflation would be best described as
a. cost push

b. demand-pull
c. it depends on the reason E[π] increases

d. neither

21. Suppose the economy has an inflationary gap in the short run. What will happen to E[P] and the (short run) AS curve?
a. ?[?] ↑, AS shifts up
b. ?[?] ↓, AS shifts up

c. ?[?] ↑, AS shifts down

d. ?[?] ↓, AS shifts down

Answer 1

1) Option B - Demand Pull
If the Fed executes an open market operation for lowering the Fed funds rate then it will be supplying more money in the market. The higher money supply drives down interest rates and cheaper credit induces consumers to spend more. The increased demand in the economy pushes up the price level and results in inflation. The inflation as the consequence of a higher aggregate demand referred to as demand-pull inflation.

2) Option A - Cost Push
The aggregate demand for the oil is almost constant but the aggregate supply has been disrupted. This is a negative supply shock and suppliers have to import oil at a higher price. This is a rise in input cost and so it is known as cost-push inflation.
The supply shock or any other reason which increases the cost of input and final price of the product is cost-push inflation.

3) Option A - ?[?] ↑, AS shifts up
The inflationary gap is the situation where the output is above the full employment output in the economy. The increased production could be due to a higher level of employment or higher government expenditure. This causes increased consumption. In the correction, the prices will go up and the short-run aggregate supply curve will shift towards left or in the upward direction to close that inflationary gap.