Both supply and demand shocks can cause inflation, but, without money growth the inflation would be short lived. Discuss.

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ECO1001 Economic Analysis - Semester 2 Assessed Essay (Macroeconomics)

Title: Both supply and demand shocks can cause inflation, but, without money growth the inflation would be short lived. Discuss.

Inflation is the term used to describe a continuous increase in the general price level for goods and services over a period of time. Inflation is a measure of the percentage change in price index usually measured annually. Price indexes are used to measure price levels; they measure an average of the prices paid by consumers for a fixed "basket" of goods and services. The two main types of price indexes used are CPI (consumer price index) and RPI (retail price index), the difference between the two being that RPI includes mortgage interest payments so tends to be more volatile. Rising price levels, inflation, results in each unit of currency being able to buy fewer goods and services, therefore the purchasing power of money is eroded.

There are many views and explanations of the causes of inflation. The quantity theory of money is currently regarded as the most accepted model of inflation in the long run. However when it comes to inflation in the short run there is