For the economy as a whole, demand pulled inflation refers to the price increases which results from an excess of demand over supply. It is a form of inflation and categorized by the four parts (households, businesses, governments and foreign buyers). When these parts want to purchase greater output than the economy can produce and we need more cash to buy the same amount of goods as before and the value of money falls, so they have to compete in order to purchase limited amounts of products and services. Generally, the demand-pulled inflation result from any factor that increases aggregate demand. Also, an increase in export and two factors controlled by the government are increases in the quantity of money and increases in government purchases
First are demand side policies which there are fiscal policy and monetary policy. Fiscal policy will increase income taxes to decrease disposable income, lower corporate taxes to cut back on investment and lower government spending. These will directly impact on aggregate demand to decrease the price level. For monetary policy government could increase interest rates and reduce the money supply. However, in the long run these will have an effect on unemployment that will rise up and getting even worse.
How the Exchange Rate Affects Inflation If there is a depreciation in the exchange rate, this depreciation should cause inflation to increase. A depreciation means the currency buys less foreign exchange, therefore, imports are more expensive and exports are cheaper. Therefore, we get: • Imported inflation. The price of imported goods will go up because they are more expensive to buy from abroad • Higher domestic demand. Cheaper exports increases demand for UK exports.
Increasing taxes, especially on the rich, generates more money for the government to spend on public healthcare, education, etc. These benefits can thus be extended to a larger section of the population and the skill sets of the population rise. This spur in productivity leads to economic growth in the long run. The government can also invest in the Research and Development sector to give an impetus to innovation. The increased revenues from taxes can be utilized on infrastructure projects.
Higher deficit also increases the cost of financing the deficit which implies that the future generations will be paying interest on the current levels of debt. Further, it has also been observed that government spending as a percentage of GDP has grown too high thereby crowding out (the more efficient) private sector. Many claim that governments with lower share of GDP tend to be more successful, though global evidence is very mixed. Examples of countries that have pursued austerity and later showed strong economic growth: Canada in 1993-96, cut fiscal deficit but maintained strong growth. In contrast, more recently, supporters of austerity argue that the rebound in economic growth in Latvia and Estonia show that countries who pursue fiscal austerity can overcome their problems (Latvia showed fastest
These four phases contribute to real GDP and are categorized into two groups: a positive growth feature and a negative growth. Under positive growth feature, expansion’s real GDP increases, increasing economic activities with a decline in unemployment but keeping the rate positive. Businesses make overtime to meet the demand of products which help with the growth of the economy because economic activities are active in this phase. Consumer spending and business spending increases slowly with inflation that is moderate but starts decreasing. The trough is the second feature of a positive growth because its real GDP starts to increase from a decreasing phase.
His ‘dash for growth’ led to the Barber boom. Unfortunately, it also led to inflation and unsustainable growth (BBCNEWS, 1999). 3.3. Supply Side Policies Supply side policies refer to the policies that are design to increase the rate of the economy growth in a long run by improving the productivity and efficiency of the
Lose the cost benefit(threat) Strong U.S. dollar will increase exchange rates. It may make it more expensive for Apple in some key markets like China. Apple can increase the price to earn more. Some developed countries are stagnating, like U.S, and people will lose interest to buy higher-end consumer products in this kind of countries. So that, there is some decrease of the hidden market for higher-end consumer products such as those marketed by Apple.
At this point, because of QE will increase the money supply in the markets thus large money in the markets contract money market liquidity. Therefore, market participants feel more secure for the reason that continuing to exist availability of funds (Kimura & Small, 2004). In addition, the QE involves purchasing long-term securities and paying by increasing reserve balances. In this way, in term of liquidity reserve balances are a more liquid asset compared than long-term securities. Hence, liquidity in the hand of investor increase.
As the interested customers will be willing to pay higher prices to purchase these goods. This theory is also part of Keynesian argument. The figure 2.0 shows what happens in demand pull inflation. So as the demand increases the prices also increases moving from AD1 to AD3. Figure 2.0 C. Effects of Inflation Firstly, due to inflation the value of money falls.