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). This theory can be summarized as "large sum of money purchasing few goods". In other words, the growth in demand is much faster than growth in supply and price rise is continuous. This is usually a scenario observed
Therefore Economists best define it as the general (or average) increase in price level. Three common types of inflation are Deflation, Reflation and disinflation. 1. Deflation Deflation means a decline in the level of prices. In some cases, it could be defined as falling prices and substantial unemployment.
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.
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.
A rise in output will boast the demand for money which will also increase interest rates, as such as, LM curve is upward-sloping. The point where IS and LM curves intersect indicates that both goods and financial markets are in equilibrium. The hike in price level will decrease real money stock and increase interest rate. Hence, this causes the LM curve to shift upwards to a new intersection point with a lower output and higher interest rate. This inverse relationship between output and price level is known as the aggregate demand relation and thus it is
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.
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.
Overview The Bullwhip Effect is a phenomenon in the distribution channel which forecasts the actual yield inefficiencies in a supply chain. It refers to the increasing fluctuations in the inventory as per response to shifts in consumer demand on moving further up in the supply chain. The bullwhip effect was named actually for the way the scale of a whip increases down its full length. The further we move away from the originating signal, the greater the distortion of the resulting wave pattern. Thus in a similar manner, we can conclude that forecast accuracy decreases as move further upstream along the supply chain.
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. Subsequently, interest rates will be augmented by the central bank but will unfortunately disturb the economic growth and asset markets, and possibly developing into a decline of the currency’s value. There are widespread, two ways of intervention in foreign exchange market by central banks. The one is unsterilized foreign exchange intervention. Central banks usually buy and sell international
The relationship between inflation and unemployment is mainly represented by the Phillips curve. The Phillips curve shows that a change on the rate of wage inflation will result to changes in unemployment over time (Hoover, 2008). A decrease in the unemployment rates would lead to an increase in wage, which would then lead to an increase in the cost to produce a good or service. The rise in the prices of goods and services would then be reflected as an increase in the inflation. Since inflation responds to a sudden change in economic conditions, a way of predicting or identifying the causes that will likely lead to the increase of inflation rate will be extremely useful for policymakers.