1. Review the attached Knowledge@Wharton article "Inflation: What Lies Ahead?

Every discussion has been "all inflation, all the time" over the past few weeks. The economy is experiencing unprecedented robust growth thanks to the "great reopening," but the prevailing worry is inflation. There are widespread examples of recent price increases, including lumber, hotels, gasoline, used cars, rental cars, and semiconductors. This was highlighted by the April Consumer Price Index (CPI), which jumped 4.2% year over year, the fastest pace since 2008. Wholesale prices in April, as measured by the Producer Price Index (PPI), jumped 6.2% year over year. Also, more than one-third (36%) of the April survey respondents of the National Federation of Independent Businesses (NFIB), the largest small business association, raised average selling prices. That is the highest reading since April 1981. Additionally, inflation fears are being fanned by wage concerns. Indeed, businesses, especially small businesses, are struggling to hire workers. The NFIB's Hard-to-Fill Index, which gauges positions that couldn't be filled, spiked in April to 44%, the highest in the survey's 47-year history.

How should the Fed respond? Compare the Fed's actions on raising interest rates or keeping it at near 0% to combat inflation and how it will influence the components of AD and AS. Make recommendations based on your analysis:

1. Briefly explain how it would affect the following in the short run: household consumption, private savings, business investment, government spending, net exports, output and price level.
2. Explain how it impacts the US economic growth rate, wages and unemployment rate over the next year?