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.
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.
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.
Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms. (Higher wages may also contribute to rising demand) 2.2.2. Import prices If there is a devaluation then import prices will become more expensive leading to an increase in inflation. A devaluation or depreciation means the rand is worth less, therefore we have to pay more to buy the same imported goods. 2.2.3.
The long term effect is that there will be a surplus in the market. Rental ceiling below the equilibrium price The renters will increase their demand for houses as the prices are less than what they are willing and able to sacrifice. The suppliers, on the other hand, will reduce their supply as the current prices are below what they are comfortable with. The long term effect is that there will be a resultant shortage as the demand will be in excess of the supply. Recommendation The board should continually adjust the rental laws to suit the forces of demand and supply so as to avoid either a shortage or supply.
Contractionary monetary policy - is a broad policy applied by most countries or central banks to bring down the inflation rate. When a central bank applies this policy, it utilise the interest rate as an instrument for controlling the money supply. The contractionary (or tightening) monetary policy refers to an increase in the interest rate by the central bank, with the aim of reducing the demand for money. When interest rate rises, the cost of borrowing credit increases as well, leading to a decrease in the demand for bank credit. Moreover, the total money stock in circulation along with spending will decrease.
The new relative demand curve would intersect the relative supply curve for labor at a lower relative wage. As a result, the wage relative to the rental falls. The lower wage causes both industries to increase their labor-capital ratios. According to the Stolper-Samuelson theorem, in the long run, when Home opens to trade and faces a higher relative price of cloth, the real rental on capital in Home rises and the real wage in Home falls. In Foreign, the changes in real factor prices are just the reverse.
.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
Also if there`s a decrease in supply or the expense to process these products increases, therefore putting pressure on the price of the goods. When supply decreases the demand doesn’t decrease that easily and companies have to increase their prices to make up for the profit lost. Below is a diagram showing what happens during cost push inflation when supply and prices increase. As seen from the diagram the supply curve (S0) met the demand curve at point Z, the equilibrium. Then supply increased and prices increased with it at point Y, the new equilibrium.