Firstly, demand- pull inflation. A situation where aggregate demands for goods and services greater than the available supply of the output. This will cause the general increase in price level of the economy. Lower tax at increase government spending will lead to demand- pull inflation. A failure of the Central Bank to region in the MS also makes the demand- pull inflation worse.
1.0 Overview Summary 1.1 Background of the Study The relationship between inflation and economic growth is a debated topic. According to the Khan and Senhadji (2001), the different level of economic development countries will show the different result of the effects on inflation to economic growth as means that the inflation rate of the developing and undeveloped countries is higher than the developed countries. Besides, the highest the macroeconomic development such as trade openness, public expenditure and capital accumulation bring nonlinearity relationship of inflation to the economic growth. This is because the high volatility of exchange rate and the competition between countries during the trade openness has increased the inflation.
The cost push inflation is caused by a drop in aggregate supply (potential output), this may be due to natural disaster, or increased prices of inputs e.g. a sudden increase in oil may lead to increased oil prices, and can cause cost push inflation. Cost push inflation happens when production costs rises. Sellers can no longer supply the same output at current prices, and again demand-pull inflation is set off by an increase in demand for goods and services without any increase in supply. Some of the major effects of inflation are as follows: 1.
An economy with a production level higher than its natural level will lead to an inflation. The central bank and governments constantly regulate increase in price level of goods and services in order to avoid hyperinflation which would be damaging to a country’s economy. In the medium or long run, an economy with a production level above its natural level can return to equilibrium using a number of methods. In this essay, price is adjusted by wage setters from short run to medium run and central bank implements monetary contraction to lower output. Phillips Curve will be used to show the effect of inflation on unemployment and data on France will be used to illustrate my answers.
The higher wage cost reduces the firm’s profit level and the relationship between inflation and output become implicitly negative (Gokal and Harfi (2004)). 2.1.2. Neo-Classical Growth
The inflation rate is the percentage rate of change of a price index over time. Effect of Inflation on Economy General Effect A raise in the price’s general level indicates a decline in the currency’s power of purchasing. Each unit of finance purchase little goods and service if the level of price increases. Inflation deteriorates the actual money value (the functional currency) and other items with a fundamental nature of finance for example loans and bonds. Negative Effect To whole economy, the rates of high inflation rates are observed as adverse.
Inflation What is inflation? Inflation is defined as a continuous increase in the price level of goods and services along with a decrease in the purchasing power of the money. It is measured as an annual percentage increase with respect to a standard. Causes of inflation: There are many causes of inflation; some of them are as follows: 1. Demand Pull Inflation: This sort of inflation occurs when aggregate demand is more than the aggregate supply leading to decrease in unemployment (as per the Phillips curve).
The rational expectations theory is often used to explain expected rates of inflation. For example, if inflation rates within an economy were higher than expected in the past, people take that into account along with other indicators to assume that inflation may further increase in the future. The rational expectations theory also explains how producers and suppliers use past events to predict future business operations. If a company believes that the price for its product will be higher in the future, for example, it will stop or slow production until the price rises. Since the company weakens supply while demand stays the same, the price will increase.
Fluctuations in the real national income are usually cyclical. An expansion of the economy brings about a corresponding increase in quantity demanded for normal goods while a contraction in the economy causes a decline in the demand for the normal goods. On the contrary, the demand for inferior goods is not recurrent (Pech 24). The more the positive value for income elasticity of demand for a product is, the more sensitive consumer demand is to the fluctuations in national
As a value-added tax, the goods and services tax (GST) is chargeable to the final consumer and it will increase the tax burden to consumer when they purchased the goods or services as the input price and selling price increased. From the articles that we found, we know that unemployment rate of Malaysia is decreasing recently. When unemployment rate is decreasing and firms need to hire more employees, they will spend more money on salary to hire a worker. Therefore, it will lead to an increase in wage rate. Thus, it will increase the cost of production since employers need to pay higher salary to their employees.