Also, it refers to the general price level increase because of increasing of consumer which is manifested in consumer price index (CPI). CPI is used by the consuming public to recognize how their purchasing power is getting effected. It aims to compare the cost of purchasing the market basket bought by a typical consumer during a specific period with the cost of purchasing the same market basket during earlier period. (Gwartney, James D.; Stroup, Richard L.; Sobel, Russell S. 1999) Due to real factors, the demand-Pulled Inflation will occurred by issues such as: fall in tax rates, without change in government spending, increase in investments, increase in government spending without change in tax revenue, decrease in savings, increase in exports, and/ or decrease in imports. For instance, buyers started generating more income or more volume of money, thus there will be high demand and the price of the goods or services will be increased.
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.
Introduction A liquidity trap is a situation where conventional monetary policies are ineffectual because nominal interest rates are of insignificant value. In other words, applying monetary base into the economy is useless because the private sector views the base and bonds as perfect alternatives. Hence, a liquidity trap could occur in an economy with a flexible price or full-employment. The problem, however, in a liquidity trap is that markets believe that the central bank aim at price stability when presented with the opportunity and as a result any current monetary expansion is only short-term. This maintains that monetary policy is ineffective in a liquidity trap and that fiscal expansion is the solution.
Fischer’ transaction Approach can be also described as follows: MV=PT Where, M stands for Money Supply, V are the Velocity of money circulation, P is the Price Level and T is a Transaction. From the equation above and based on theory assumptions, there is unidirectional causality from price to money supply, it therefore that the price is directly influenced by an increase in money supply. For T increases, P will remain relatively constant; however, if there is no corresponding increases in the quantity and services produced, P will increase. Consequently this increase in price level causes inflations (cited in: Sattarov, 2011). 2.1.6.
E., & Quadrini, V. (2009). This is recognized as currency intervention, central bank intervention, or as Forex market intervention. When a nation’s currency is enduring a very high degree and not needed upward or downward financial (constraint of circumstance, commonly because of the high volatility from a rise and fall of trading by speculators and market players) the central bank will use Forex market intervention to stabilize the situation. Central bank intervention can be used to increase or decrease a currencies value, most commonly for increasing and decreasing productivity and exports of a nation, Wright, R. E., & Quadrini, V. (2009). 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.
sustained significant rise. The Fisher effect was first discovered by the famous economist Irving Fisher to reveal the relationship between inflation expectations and interest rates. It points out that when inflation is expected to rise, interest rates will also rise. In this case, The Fisher Effect Formula Real Interest Rate = Nominal Interest Rate - Inflation Rate The left and right sides of the formula to look at, the formula becomes: Nominal Interest Rate = Real Interest Rate + Inflation Rate In an economic system, the real interest rate is often constant, because it represents the actual purchasing power of you. In this case,Thus, when the inflation rate changes, in order to obtain the balance of the formula, the nominal interest
There are different types of monopoly: natural, legal, private, or public (government) c. A monopolist has full control of the supply of the product, hence the elasticity of demand for a monopolist product is zero. d. There is no close substitute of a monopolist’s product in the market, thus, the cross elasticity of demand for a monopoly product with some weak substitutes is very low. e. There are restrictions or barriers on the entry of other firms in the area of monopoly product. f. A monopolist can influence the price of the product. He is a price maker.
Demand pull inflation and cost push inflation. The demand pull is the result of increased aggregate demand.This type of inflation referenced in the article shows a growth in gross domestic product, or GDP. The demand pull inflation and cost push inflation are shown on the graphs below. The demand pull graph depicts an increase in aggregate demand leading to a higher price level for goods. The Yinfl line on the graph represents the point that is greater than potential output.
Indeed, the government imposes price controls as it is not satisfied with the market price.A price ceiling creates a shortage when the legal price is below the market equilibrium price, but has no effect on the quantity supplied if the legal price is above the market equilibrium price. A price ceiling below the market equilibrium price creates a shortage that causes consumers to compete vigorously for the limited supply. Supply is limited because suppliers are not getting the prices that would allow them to earn a
In break-even all the cost are fixed or variable. It is just from supply sides which for cost. It assumes that fixed costs are constant. Although this is true in the short run, an increase in the scale of production is likely to cause fixed costs to rise. It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales.