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.
Direct and indirect effects could happen as the money supply increases; the direct effect being that people will demand more goods and services and the indirect effect being that people will save more money, depositing this in banks (Monetary Policy, n.d.). Therefore, excess reserves will also increase and the banks will be able to lend out more. Banks will motivate borrowing by lowering interest rates and this will increase the demand for investment and consumption and therefore aggregate demand will increase. Businesses respond to increased sales by producing more, thus increasing production. An increase in production would require more labor, thus lowering unemployment, and raises the demand for capital goods.
Monetary Inflation: Monetary inflation is a form of demand-pull inflation. In this case, excess demand is created by an excessive growth of the money supply. A group of economists, appropriately called monetarists, believe that the only cause of inflation is the money supply increasing faster than output. They argue that if the money supply increases, people will spend more and this will lead to an increase in prices. In explaining their view, monetarists examine the relationship between the money supply and the velocity of circulation on one hand and the price level and output on the other.
This paper attempts to club all of Hume’s Economics ideas and underscore his contributions to the discipline. Essay:- Hume’s contributions to the field are multifold and prominent among modern economists is his quantity theory of money in an open economy. Drawing upon history, he argued that an inflow of specie, as a result of an increase in net exports, would subsequently lead after a lag, to a rise in the general price level. Thus, attracting increasing amounts of bullion or silver (specie) within a nation would only curtail export competitiveness, undermine the nation’s wealth and transmit this advantage to competing nations and enhance the overall price level thereby rendering imported goods more desirable which would lead to an outflow of specie and a return to the original status quo. This
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
In some cases, it may increase the burden on the general economy especially if the country is currently suffering from high inflation and unemployment rates. If a Fixed Exchange rate policy was used it may alleviate or reduce these existing problems since the Central Bank would have a “closer watch” on the market and intervene as it deems fit. Interest rates, economic policy and stability within the economy promote a strong currency. A strong currency boosts the prices of exports thereby affecting the country’s ability to compete on the global market. However, whenever the currency is weakened, the cost of imports increase which increases domestic inflation.
On the other hand, the LM curve is affected by Monetary Policy. An expansionary monetary policy (where the monetary authority of an economy purchases bonds to expand the money supply) would cause the LM curve to shift to the right. A contractionary fiscal policy (central bank buys back bonds to reduce the money supply in the economy) would shift the LM curve to the left. IS/LM curve shift can also cause fluctuations in Business Cycle. Business Cycle is the movement of GDP in the long term.
The first one is cost of production- cause if the cost of any factor of production decreases, the quantity that producers are able to supply at a given price increases. Second is changes in government policy, as in government spending and taxation influence employment and household income, which dictates consumer spending and investment. Third one is changes in the numbers of producers increased demand to increased supply, decreased demand so it will decrease supply. There is also two terms you need to know about supply elasticity, one is if supply is elastic, a change in the price will cause a change in the number of items produced. The other is inelastic, a change in the price will not cause a change in the number of items produced.
They stated that depreciation may lead to cost of imports increase, domestic price level increases, therefore it would expectedly have a negative impact on stock market returns. Similarly, Adjasi & Biekpe (2005) stated that exchange rate depreciation will reduce stock market return. Morley & Pentecost (2000) affirm that stock markets and exchange rates are related, and it is through a common cyclical pattern rather than a common trend. When foreign investors purchase a country’s stock, the capital inflow will results in domestic currency appreciation, while currency depreciation when capital outflow. However, there is a significant long run relationship exists between exchange rate and stock market returns (Muktadir-al-Mukit,
He observed that the increase in price level was less in proportion to the increase in gold and silver. Hume explained this non proportional increase to happen because of a “change of customs and manners” (OM 292). Modern monetary theorists would ascribe this phenomenon to a gradual rise in productivity. His argument was essentially the monetarist quantity theory of money: a country’s prices change directly as the money supply changes. He explained that with the increase in net exports and rise in the gold flow into a country to pay for them, the prices of goods in that country will rise.