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macroeconomics inflation summary
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Macroeconomics inflation chapter summary
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Chapter 30: Inflation, unemployment and the business cycleTypes of inflation:
Cost push inflation
Demand pull inflation
Demand pull inflation:
Inflation that starts because aggregate demand increase
Can be kicked off by any factors that change AD
Eg: cut in interest rate, increase in Q of money
Increase in AD raises price level and increases real GDP, money wage rate rises, SAS
shifts left, Price level rises further and real GDP declines
When unemployment is below its natural rate, there is a shortage of labor. Therefore,
money wage rate rises. As it rises, short run AS decreases and SAS shists left, price level
rises again, real GDP decreases
Cost push inflation:
Kicked off by an increase in costs
Main sources of increase:
o Increase in money wage rate
o Increase in money price of raw materials
At a given PL, the higher the cost of production, the less companies are willing to
produce
If money wage rate/prices of raw materials rises, firms decrease supply
AS decreases & SRAS curve shists left
Deflation:
An economy experiences deflation when it has a persistently falling price level
What causes deflation?
Pl can fall because AD decreases or SRAS increases
PL falls persistently if AD increases at a slower rate than AS
Inflation Rate = money growth rate + rate of velocity change – Real GDP growth rate
Consequences of deflation
Redistributes wealth
Lowers Real GDP and employment
Diverts resources from production
Real wages rise and fewer workers are hired, level of employment ad output fall
Investments fall, slows pace of capital accumulation, slows growth rate of potential GDP
Low nominal interest rate, increase in quantity of money people hold, decrease in
velocity of circulation, lowers inflation rate
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