1.2. Because of price stickiness, the Keynesian model predicts that an increase in the growth rate of money will lead to higher inflation only after some lag, when firms begin to adjust their prices. Using data since 1960, graph the inflation rate and the rate of growth of M2. Prior to 1980, is it true that increases in money growth only affected inflation with a lag? What has happened since 1980?

Keynesians argue that financial innovations, such as the introduction of money market deposit accounts at banks, led to a large increase in the demand for M2 in the early 1980s. If this claim is true, how does it help explain the relationship between money growth and inflation that you observe after 1980?