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.
Prior to that, the most common reason for central bank intervention over the last decade or so would be because of a sharp or sudden decline in the value of a currency. It can however turn problematic for a nation to use market intervention whenever the currency value does decline steeply in the foreign exchange market and it will lead to several disadvantages to the nation. Export-dependent countries could spiral into recession if they become too reliant on market intervention. Global trading partners’ exchange rates will rise as well, while the prices of their exports increase within the global market place. A decline in value of a nations’ currency can also lead to an increase in inflation as prices of imported services and goods will go up.
In some cases, it could be defined as falling prices and substantial unemployment. Also, according to Van Der Merwe and Mollentze (2010:19) said Deflation is the opposite of inflation. Deflation is therefore a continuous decline in the general price level of the economy. 2. Reflation Reflation means normalising prices that have previously fallen.
The GDP growth rate in table 1 decreases from 6.99% to 5.35% from 1982 to 1983, similarly table 2 shows GDP growth rate falling from 1.59% to 1.08% during 1980 to 1981. This drop in GDP growth rate shows that output level is being reduced to its natural output level. Furthermore, interest rates increase from 0.28% to 0.96% in the year 1969 to 1971 and 0.76% to 2.32% in the year 1980 to 1981. The rise in interest rates is due to the effect of monetary contraction enacted by the central bank by directly or indirectly reducing nominal money. On both occasions, inflation decreases from 6.04% to 5.4% and 13.54% to 13.33% respectively, whilst unemployment rate increases from 2.20% to 2.38% and 5.38% to 5.99% respectively.
U.S. economics professor Robert Gordon attributes the recent slowdown in economic growth in the U.S. to four main headwinds: demography, education, inequality and government debt. This paper will analyze two of these headwinds, demography and education, both of which are connected to innovation positively or negatively. The first headwind is demography. In general, the U.S. population is projected to grow more slowly in future decades than in the recent past, which will result in a decline in labor force participation. These demographic changes have a significant impact on economic growth.
Could you possibly imagine how this government action would impact the economy as a whole? To understand the ups and downs of the economy it is imperative to understand the connotation of inflation, its harms to the economy, and deflation in the Business Cycle. Inflation is defined as a prolonged increase in the general level of prices, and this has a direct impact on the purchasing power and the economy’s health. It is a result of an economic boom or peak (stimulated by various factors) when aggregate demand rises faster than supply can increase. In Econland, the monetary policy that increased money and credit supplying led to inflation.
.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
2. Rising labour costs - caused by wage increases that exceed improvements in productivity. Wage and salary costs often rise when unemployment is low (creating labour shortages) and when people expect inflation so they bid for higher pay in order to protect their real incomes. 3. Higher indirect taxes imposed by the government – for example a rise in the duty on alcohol, cigarettes and petrol/diesel or a rise in the standard rate of Value Added Tax.
The change in exchange rate brings different change in economy like if the exchange rate increase the export will increase and import will decrease. The domestic product becomes cheaper than the foreign product. When the exchange rate increases the demand of the export products increase and import products decrease. The factors which affect the most to the exchange rate are inflation. Inflation is a situation in the country when the prices of goods and services increase.