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.
The oil price increase may affect the economy activity, especially in the increase in the cost of production of goods and services, which in turn may influence the inflation rate, consumer confidence, and financial markets. Inflation happen will be transposed to consumer which eventually reduce their purchasing power and investment. During oil crisis in 1973-1974, a decline of stock prices is interpreted by the increase in oil prices and it indicate that oil price change may lead to stock market returns volatility (Bina & Vo, 2007). Crude oil price is the primary fuel of industrial activities and plays a significant role in shaping the economic and political development of the countries, not only by directly influencing the aggregate indicator but also by affecting the companies’ operational costs and its revenue. When the stock market is efficient, positive crude oil price shocks would adversely impact the companies’ cash flows and market values, lead to immediate decline in the overall stock market returns (Hamilton, 1983).
Thus, cost-push inflation will occur and there will be a shift inward of short-run aggregate supply curve from SRAS1 to SRAS2(as shown in figure 2, SRAS shift inward from SRAS1 to SRAS2) leading to an increase in the price level from P1 to P2 and a fall in the real output from Y1 to Y2. A weakening currency which makes fuel and other imports more expensive in Brazil will also lead to an increase in the costs of production to the country’s firms. Therefore, cost-push inflation which occurs as a result of an increase in the costs of productionhigh interest rates should lead to appreciation of currency. Therefore, decrease in prices of imports and costs of
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
CAUSES OF FLUCTUATIONS IN SECURITY PRICES The prices of securities are determined by the forces of demand for and supply of shares in the stock market. The factors which affect the demand for and supply of securities resulting in their price fluctuation are as follows. • Financial position of the company: The strong industrial base of the company directly influences the prices of its shares. When a company earns higher profi ts by increasing sales or declares higher rate of dividend, the price of its shares increases. If a company fails to pay dividend then its shareholders will start selling their holdings and the price of shares will go down.
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
This signified as a drop and it reflected on the World oil price market that alerted countries to tighten energy product supplies due to slow oil production. It was stated that the Iranian revolution was the closest cause of the highest price in post – WWII history. However, it could be argued that the revolution’s impact on prices would be temporary and it boosts Iranian oil production after the revolution to four million barrels per day. At the same time Organization of Petroleum Exporting Countries was trimming output as well as the companies and governments started to build reserves. With the combination of those actions causes an upward surge on oil prices which escalated from $14 per barrel of the beginning of 1979 to more than $35 per barrel in 1981.
Cost-push inflation happens when we face higher prices due to the increase in cost of production and higher costs of raw materials. It is determined by supply side factors. Cost-push inflation can be caused by higher price of commodities, imported inflation, higher wages, higher taxes and higher food prices (Economics Help, 2011). Demand-pull inflation happens when there is an increase in the price of goods and services when demand increases too much that it outpaces supply (US Economy, 2015). Sometimes people refer it as “too much money chasing too few goods”.
In fact, other businesses were also indirectly affected including the consumers where they were of the notion that the increase in the price of the retail petroleum products could cause a general increase in the price of goods and services in the market. The impact of inflation on stock market returns is becomes an important issue for a many years. Inflation is most important macroeconomic variable that have negative impact on economic activities. Higher inflation lead the interest rate be higher and it cause the rate of returns on stock will be raised. To get the knowledge about the impact of inflation is very important for an investor if it became out of control then plans may destroyed.