799 "
© 2014 Pearson Canada Inc."- Explain and show graphically why continuous monetary growth is needed to generate
inflation. Describe how the inflation process is generated.
Answer: Only continuous monetary growth can cause continuous increases in aggregate demand
of the sort needed to generate inflation. Other factors can increase demand and the price level,
but none can increase demand continuously. In the graph, the monetary expansion shifts AD to
the right. The increase in output above the natural rate increases wages, shift AS to the left.
Monetary expansion shifts AD repeatedly, and wages continue to adjust.
Diff: 2 Type: SA Page Ref: 613 - 614
Skill: Recall
Objective List: 26.3 Explain Milton Friedman's famous proposition that "inflation is always and
everywhere a monetary phenomenon"