The latest estimate of inflation for the past year is approximately 8.6%. This rate of inflation is the highest since the early 1970s. I remember it well. There is a debate of the cause for the current inflation. The debate emphasizes the cause as a Supply Shock or a Demand Shock. Please answer the following questions using Aggregate Demand (AD) and Aggregate Supply (AS) as presented in chapters 21, 22 & 23.

a. Define inflation and explain two of the indices used to measure inflation.

b. What did Milton Friedman mean when he stated Inflation is always and everywhere a monetary phenomenon,?

c. How does Friedmans statement relate to the Quantity Theory of Money? The Quantity Theory statement takes the following form: %P = %M + %V - %Y