1. Use an Aggregate Supply -Aggregate Demand Model to explain cost-push inflation.

Students should provide a standard model of Aggregate Supply and Demand with all items labeled clearly. In your discussion point out the difference between a micro model of supply and demand and the macro model of aggregate supply and demand which measures price level on the vertical axis instead of price. Increasing prices of goods and services between businesses are included in the model by shifting the aggregate supply curve to the left and "pushing" prices upward. Suggest to the students that they label points on the graph so they can discuss the movement in the graph by indicating a movement, say, from point A to point B.

2. Why does this report suggest that the Fed may not move to lower interest rates in the near future?

As the article states, the Fed uses an increase of more than 2 percent to indicate the presence of too much inflation. If the Fed thinks there is too much inflation they are likely to induce monetary policy to correct for the increasing prices. The applicable monetary policy for this condition would be to increase interest rates, not lower them. If you want to extend this discussion, you can discuss each of the tools of monetary policy and how they are used to combat inflation.

Multiple Choice/True False Questions