Question 2 [CLO3. 8 marks] Read the extract below from voxeu.org: Goods inflation is likely transitory, but upside risks to longer-term inflation remain Yunjong Eo, Luis Uzeda, Benjamin Wong 29 April 2022 Supply chain disruptions and labour shortages coupled with demand-side pressures have seen goods inflation soaring since early 2021. This column shows that while goods inflation used to contribute to permanently higher headline inflation, such as during the Great Inflation of the 1970s, since the early 1990s it has become predominantly transitory The current high goods inflation can therefore be expected to be somewhat short-lived. Nonetheless, the authors document that the upside risks to longer-term aggregate and sector-specific inflation remain greater than usual. Inflation is back. Annual CPI inflation for the US hit a 40-year high of 8.5% in March 2022. This increase continues a pattern that started in May 2021, when annual inflation breached 5% for the first time in 30 years. It has been rising steadily since. While the high level of inflation is certainly a concern, a key policy issue is whether its current surge represents a transitory or a persistent phenomenon. Describing inflation in terms of its permanence (or lack thereof) is not simply an academic characterisation, Until very recently, the Federal Reserve relied on such a strategy to communicate staff views on the (potentially transitory) nature of current inflationary pressures. Against this backdrop, conventional wisdom holds that it takes 12-18 months for the effects of monetary policy to percolate. This suggests central banks should act only if they perceive that inflationary pressures are likely to be persistent. Questions: 1-Explain what is meant by CPI [2 marks]. 2-In which ways can central banks act in the presence of inflation? [2 marks].3-Explain, with the help of the aggregate demand and supply model, how supply chain disruption, labour shortages coupled with demand-side pressures have caused inflation to soar. [4 marks]