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.
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
.3.3 Inflation Rate The inflation rate used as an indicator in measuring the stability of economic condition for a particular country (Rashid et al., 2011). In financial theory, inflation rate reflected by consumer price index (CPI) represents all the price of goods and services will go up and it need to take more money to buy the same items. Moreover, high inflation is likely cause a great impact on economic activities of a particular country because it reduces the purchasing power of domestic consumers and it would lead to currency value decline. The previous researchers believe that the inflation rate will influence the stock market return. There are many empirical studies establish that the inflation rate has an impact on stock market
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.
With the price of housing, food, etc. going up, and the value of money going down, the cost of living increase exponentially. The cost of living is something that affects everyone, rich and poor, meaning people who are lower middle class would end up being forced down into poverty, once again, increasing the poverty rate. The final way the counterclaim is disproven, is because the increase in taxes would likely offset any monetary gains people would be
because of less supply. The opposite effect of this is called demand pull inflation where higher demand triggers inflation Apart from rise in prices of inputs, there could be other factors leading to supply side inflation such as natural disasters or depletion of natural resources, monopoly, government regulation or taxation, change in exchange rates, etc. Generally, cost push inflation may occur in case of an inelastic demand curve where the demand cannot be easily adjusted according to rising prices. In this case, the firm will have to increase the price of the item their produced to cover up the cost that they already spend for their employee’s minimum wage implementation. This is important as the firm will have
Factors effecting business cycle Employment At times of high unemployment, factories are underutilized, output is lowered and the economy can suffer to the point of recession. Conversely, low unemployment can result in higher productivity and an improved economy. Employment is just one variable, and its effect should be considered in conjunction with others. Roger Leroy Miller, author of “Economics Today,” reminds us that technological innovation can displace workers and increase unemployment, but it can also result in an increase in output. Inflation Inflation occurs when the average prices of goods and services rise.
A high inflation will depreciate the domestic currency and an increase in inflation will increase the demand for foreign goods. It also decrease export, leading to balance of payment deficit. Hence, exchange rate on the foreign base countries currency will rise which appreciate the home base currency, (Madura, 2008). He also explained the relationship using the purchasing power parity. The theory of PPP states that a basket of a good in one country should have the same cost in another country, taking into account exchange
Inflation is a function of supply and demand of money, defined as sustained increase in prices of services and goods over a period. It is one of the most misunderstood economic phenomenon which are difficult to forecast and control. As the price of good increases, the purchasing power and the value of currency decreases. Inflation may affect economy in both positive and negative ways. High inflation rates can make it difficult for the companies to plan their budget in each financial year as it becomes difficult to forecast prices going forward.
Unemployment is a chronic problem of our society, which hinders the progress of the population and places limits on the economic development of the country. In recent years there has been an increase in the rate of unemployment in El Salvador, which is alarming, since it impedes improving the living conditions of society. This is a problem that must be treated from the root, to be able to diminish its effects. In this context, a solution is proposed based on the study of aggregate demand, which was analyzed by Keynesianism. In order to reduce the unemployment rate, it is possible to bet on increasing the aggregate demand, for which the intervention of the State through the expansive fiscal policy is necessary.