...Inflation is not a random increase in the general price level. Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand (economic growth too fast) or cost push factors (supply side factors) . Economists divide the causes into three main categories. 1. Cost-push Inflation: Cost-push inflation occurs when the price level is pushed up by increases in the costs of production. If firms face higher costs, they will usually raise their prices to maintain their profit margins. Higher production costs led to a decrease in aggregate supply and an increase in the overall price level because the equilibrium point moved. There are a number of reasons for an increase in costs. 1) One is wages increasing more than labour productivity. This will increase labour costs. As labour costs form the highest proportion of total costs in many firms, such a rise can have a significant impact on the price level. It will also not be a one-off increase. The initial rise in the price level is likely to cause workers to press for even higher wages, leading to a wage-price spiral. The sharp rise in the price of imported oil during the 1970s provides a typical example of cost-push inflation. Rising energy prices caused the cost of producing and transporting goods to rise. Higher production costs led to a decrease in aggregate supply and an increase in the overall price level because the equilibrium point moved 2) Another important...
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...Causes and Effects of Inflation Author Author Affiliation Causes and Effects of Inflation Supply and demand are one of the key factors when it comes to the economics of a country or region. The two factors happen to be the greatest determinants of prices. In cases where there is a high demand and low supply in a region, the prices of commodities or services provided tend to hike. The hiked prices due to high demand and low supply lead to inflation. Inflation has become a worldwide phenomenon that has seen the cost of living to shoot up in most parts of the world. This increase in the cost of living is attributed to by the increase in the demand for basic commodities and a decrease in their supply due to increased cost of production. Even though the whole world experiences inflation, different countries have different inflation rates depending on their development stages. The major factors that contribute to the increase or decrease in inflation rates in a country include the quality theory of money approach, excessive demand and decrease in supply. This paper will discuss these causes of inflation and the effect they have on the economy as a whole. Causes of Inflation Many factors contribute to the increase or decrease of the inflation rate in a country. Spending habits of individuals happen to contribute greatly to increased inflation rates. A good example is when people have too much money to spend on a given product. The increase in the demand for that particular commodity...
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...1. What is inflation? Inflation is an increase in prices for goods and services (What is Inflation?). What are the causes of inflation? Inflation has a variety of possible causes, but they are between the Keynesian and monetarist theories, ranging between demand-pull, cost-push, built-in inflation, and the quantity model. With demand-pull, inflation is caused by aggregate demand being more than supply. With cost-push, inflation is caused when manufacturers and businesses raise prices due to shortages in order to balance increases in production costs. With built-in inflation, inflation occurs due to prior increases in prices caused by demand-push or cost-pull. And with quantity, inflation is caused by having too much money in the economy (What Causes Inflation?). Is inflation desirable and what can be done to control inflation in a market economy? Inflation is desirable when it is low, because low inflation represents price stability which is perfect for productive planning and investment. There are many ways to control inflation in a market economy which varies between a Keynesian and monetarist approach. Using a Keynesian approach, the government would get involved by breaking up monopolies, regulating commodity prices, and controlling wage levels, while using a monetarist approach, the government would make changes in policy in order to control the amount of money in the economy (What Causes Inflation?). 2. What is the Consumer Price Index (CPI)? Consumer Price Index...
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...Domestic 4 Causes of Inflation 5 Figure 1-The Oil Price and Inflation 5 The Effects of Inflation 7 A Comparison of Regional and Global Inflation Rates 8 Table 1-Annual Inflation Rates-Selected Caribbean Countries 8 Table 2-GDP per capita- Selected Caribbean Countries 8 Table 3-Annual Inflation Rates-Developed Countries 8 Inflationary Trends and Analysis 9 Figure 2- The Last Decade 9 Figure 3- Inflation and Unemployment 9 Conclusion 10 Recommendations 10 Executive Summary Analysing the domestic inflation rate, it was found that the main driver of inflation was food prices. Rising global food prices is expected to continue to put upward pressure on local food prices and subsequently the headline inflation rate in Trinidad and Tobago. While this is a global phenomenon, developing countries are expected to be impacted harder than that of the developed nations. This is due to lower incomes as well as less developed and efficient market systems. Food accounts for a substantial portion of imports in Trinidad and Tobago therefore making us highly susceptible to imported inflation. To limit the impact of imported inflation, local agriculture and manufacturing sectors need to expand. Another contributor to the inflation rate was the average annual oil price for the corresponding year. These two variables possessed a strong positive correlation. Energy prices affect transportation and production and when they increase, the cost of final products increase. Inflation was found...
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...Inflation and Government Economic Policies Student’s Name Course Name Instructor’s Name 1. What is inflation? What are the causes of inflation? Is inflation desirable and what can be done to control inflation in a market economy? Inflation, in simple terms, is the sustained increase in prices of goods and services produced and rendered in an economy. It is the upward movement in the average level of prices. Each unit of currency buys fewer goods and service when the general price level rises. Market power is the cause of inflation. The two main causes of inflation are: a. Demand push: When an economy is almost at full employment, the increase in the average demand with lesser supply will lead to inflation. This is because, all people will have disposable income as they are employed which gives way to the need for luxuries. When the supply is less, the prices increase. b. Cost pull: This kind of inflation is because of the rising costs. Companies have to necessarily meet these increase in costs. The best way to do it is to pass the costs to the consumers. This results in price inflation. (Economics help, 2014) Sometimes, an inflationary economy is a sign of growth. However, it may not be desired at all times (i.e.) when it grows consistently. Inflation can be controlled by increasing indirect tax rates or increasing the savings and lending rates. Increasing tax rates will make the consumers pay more tax and hence discourage them from spending. The...
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...hat is inflation? Inflation is an increase in prices for goods and services (What is Inflation?). What are the causes of inflation? Inflation has a variety of possible causes, but they are between the Keynesian and monetarist theories, ranging between demand-pull, cost-push, built-in inflation, and the quantity model. With demand-pull, inflation is caused by aggregate demand being more than supply. With cost-push, inflation is caused when manufacturers and businesses raise prices due to shortages in order to balance increases in production costs. With built-in inflation, inflation occurs due to prior increases in prices caused by demand-push or cost-pull. And with quantity, inflation is caused by having too much money in the economy (What Causes Inflation?). Is inflation desirable and what can be done to control inflation in a market economy? Inflation is desirable when it is low, because low inflation represents price stability which is perfect for productive planning and investment. There are many ways to control inflation in a market economy which varies between a Keynesian and monetarist approach. Using a Keynesian approach, the government would get involved by breaking up monopolies, regulating commodity prices, and controlling wage levels, while using a monetarist approach, the government would make changes in policy in order to control the amount of money in the economy (What Causes Inflation?). 2. What is the Consumer Price Index (CPI)? Consumer Price Index (CPI)...
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...understandable to think inflation (price increases within a country – indicating the dollar has weakened in purchasing power for domestic goods purchases) would lead to depreciation – weakening of the dollar against other currencies. The logic of this common misunderstanding is not too complex; if the dollar has weakened for a foreign import, say a $20,000 car, why shouldn’t we expect the foreign company to charge more dollars for the same good, thus indicating depreciation has occurred for the American currency? The reality is quite different and in many ways the opposite of this simplified story. Let’s say both the imported and domestic cars start at $20,000. Then there is inflation in the U.S. and the price of domestic cars, once US automakers include inflation, increases to $23,000. The imported car is still $20,000. This tends to cause U.S. buyers to switch to the 20,000 dollar import over the 23,000 equivalent domestic car, increasing the foreign firms’ market share in the U.S. It can be worth it for the foreign central bank to buy foreign reserves to maintain this favorable exchange rate. Citing research by economists Richard Clarita of Columbia University and Daniel Waldman of Barclays Capital, Nobel Laureate (Nobel Prize Winner in Economics) and international finance expert Princeton’s Paul Krugman reports that the Clarida-Waldman study confirms that inflation leads to appreciation, and the effect is stronger for core inflation (excluding food and energy)...
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...Why Inflation Is Considered a Bad Thing LaQuan Howell Embry-Riddle Aeronautical University Abstract Economist for a long time have argued about the causes and implications of inflation. This research aims at identifying the various negative implications that inflation causes. The research indicated that inflation causes negative effects like increase in prices of goods and services, interrupted purchasing power of consumers, and slow economic growth. Introduction Inflation is defined as the decrease in the value of money. It is the continued increase in the level of prices for products and services especially over a short duration of time. This means that the value of a currency does not stay constant during period of inflation, and the purchasing power of consumers’ declines. Thus, whatever consumers earn, will buy less of a good or service. When inflation increases it results to an increase in the prices of commodities, and this may bring about employees demanding an increase in wages. This normally translates to a decrease in profit for the company. Consumers will have less amount of money to use; this could translate to a decrease in company sales. Disadvantages of inflation Inflation is usually considered to be an issue when the rate rises above two percent. The higher the rate of inflation is, the more the problems it causes. Inflation affects the menu costs of goods and services. Menu...
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...| Inflation and Government Economic Policies | M3:A2 | 5/1/2013 | | ECO 201 M3:A2 5/1/13 1. What is inflation? Inflation is an increase in prices for goods and services (What is Inflation?). What are the causes of inflation? Inflation has a variety of possible causes, but they are between the Keynesian and monetarist theories, ranging between demand-pull, cost-push, built-in inflation, and the quantity model. With demand-pull, inflation is caused by aggregate demand being more than supply. With cost-push, inflation is caused when manufacturers and businesses raise prices due to shortages in order to balance increases in production costs. With built-in inflation, inflation occurs due to prior increases in prices caused by demand-push or cost-pull. And with quantity, inflation is caused by having too much money in the economy (What Causes Inflation?). Is inflation desirable and what can be done to control inflation in a market economy? Inflation is desirable when it is low, because low inflation represents price stability which is perfect for productive planning and investment. There are many ways to control inflation in a market economy which varies between a Keynesian and monetarist approach. Using a Keynesian approach, the government would get involved by breaking up monopolies, regulating commodity prices, and controlling wage levels, while using a monetarist approach, the government would make changes in policy in order to control the amount of money...
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...Project Research Tittle Inflationary cause and remedies in Latin American countries. Research Objective Aimed at trying to find out the precursors of inflation and its feasible cures. The paper examines the critical relationship between the cause of a problem and its possible solution. It emphasizes on the views of two theories– the monetarist and the structuralist theories. Overall, this paper seeks to answer the following question: what are the main determinants of inflation rates and the stabilization policies in Latin American countries according to those theories? Theoretical Background The two rivalling theories concerning causes of inflation include the monetarist view and the structuralist view. Monetarists consider inflation as a problem caused by the surplus of money supply. They [the problem and the cause] are positively correlated – when one goes up, the other follows. This is otherwise known as the Quantity Theory of Money which is the foundation of the monetarist view. Sometimes, an excess in money supply will result in the public seeking to reduce the excess by increasing spending. This in turn will cause an increase in prices, if they are free to change. If prices are fixed, this will result in either higher supply to meet higher demand or in shortages of supply which will cause overall price level to increase. Basically, the monetarist explanation proposes that an excess supply of money causes inflation. Long run changes in the demand for money...
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... The term inflation means a persistent increase in the level of prices. The question believer that an increase in aggregate demand can cause inflation, however there can also be other factors that can cause inflation. The term aggregate demand is that total planed expenditure in the economy. Known by the identity C+I+G+(X-m). In macroeconomics there are 2 types of inflation, demand-pull inflation and cost-push inflation. The demand-pull inflation is caused by an increase in total spending (aggregate demand), the economy is producing beyond the economy’s ability. The aggregate demand in an economy strongly outweighs the aggregate supply, which cause the price to increase. As the economy reaches full capacity, firms will be struggling to produce enough to meet the rising demand. As you can see from the figure, AS is slow curving up and becoming inelastic because of full capacity. The demand curve then shifts to the right because of a high demand, from AD1 to AD2. This causes involuntary stock depletion due to a low supply. When this happens, firms will choose to increase price to widen the profit margins. So price level increase from P1 to P2. Furthermore, as employment in an economy increase, the demand in goods and services will be much more inelastic. This allows firm to increase the price more without any significant fall in demand. There are various reasons that can cause an increase in aggregate demand. First of all, a decrease in exchange rate will cause an increase...
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...Assignment 2: LASA 1: Inflation and Government Economic Policies Inflation is a measure of how prices have changed over time. If prices are changing due to inflation, each dollar spent will buy less. In order to answer the questions below, go to the following website: http://www.bls.gov/cpi/ Questions: What is inflation? What are the causes of inflation? Is inflation desirable and what can be done to control inflation in a market economy? What is the Consumer Price Index (CPI)? How has the CPI behaved since the year 2000? What have been the causes of these changes? In your response, include a graph of the CPI for this period and cite your source. What is the Producer Price Index (PPI)? How has the PPI behaved since the year 2000? What have been the causes of these changes? In your response, include a graph of the PPI for this period and cite your source. What is the Consumer Expenditure Survey (CE)? How has the Survey behaved since the year 2000? What have been the causes of these changes? In your response, include a graph of the CE for this period and cite your source. What do the measures above tell us about consumer behavior? Have incomes changed enough to offset the inflation since 2000? What can we predict about future inflation? What are the implications of these measures for government economic policies? By Wednesday, January 22, 2014, create a Microsoft Word file to collate your answers and submit it to the M3: Assignment 2 Dropbox. ...
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...and Inflation and to see if the Phillips curve relationship is correct. In doing so I will study the causes and effects of inflation and unemployment along with inflation and unemployment figures from the last few years. Inflation is usually defined as a sustained increase in the general price level. We measure it as the annual percentage increase in prices. There are generally two types of inflation- Cost push and Demand pull. Demand pull Inflation occurs when there is to much spending in the economy. When consumers wish to spend money on goods and services increases faster than the supply of goods and services, or when demand exceeds supply, then prices are pulled upwards. The increase in demand causes it to shift outwards but because supply cannot keep up with demand prices go up as well. This is shown in the diagram below: For this type of inflation to occur people in general need to have a lot of money if there demand for general spending is high. Therefore this type of inflation generally occurs when there is a low unemployment rate for the majority of people must have some sort of income. Cost push inflation happens when firms costs go up. To maintain their profit margins, firms then need to put their prices up. In other words cost increases have pushed inflation up. Cost-push inflation may happen for various reasons. Wage increases - wages are a major proportion of costs for many firms and so if wages are increasing, this may well cause cost-push inflation. Government...
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...To what extent is inflation damaging to the economy? 18 Inflation is a sustained rise in the average price level. Inflation is measured in two ways the CPI and the RPI. CPI is a measure of the price level used across the European Union and used by the bank of England for setting its inflation target which is currently at 2%, it is calculated using a weighed basket of goods. This basket contains 650 goods. 100,000 households buying patterns of the goods in the baskets are recorded and the inflation rate is calculated through these figures. Maintaining a stable and anticipated inflation rate is a key government objective as it allows them to plan government spending for the future. There are two main theories for why inflation occurs demand pull and cost push. Demand pull inflation arises from aggregate demand shifting at a faster rate than aggregate supply. When the economy is working at near to its productive capacity, an increase in any components of aggregate demand are likely to cause a rise in price level as seen below. In contrast cost push inflation arises when the price level is pushed up by increases in the cost of production. A common cause of this is a faster rise in wages and a rise in the cost of raw materials eg a rise in the cost of oil will cause fuel costs to rise therefore increasing the costs of distributing goods in turn increases the cost of many household products. There are many costs associated with inflation some problems are larger than others...
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...ECONOMIC of INDONESIA “INFLATION” Created by: Gabriella Vidiananda 0810233017 Ira Ardella Putri 0810233023 Gilang Pradipta 0810233018 Accounting Department Faculty of Economic University of Brawijaya 2011 INFLATION Definition of inflation We often hear the word inflation (level of inflation) on television, in newspapers, magazines, and various other media. Inflation is one of economic symptom that has much attention from the economic expert. In many cases inflation is unbeneficial symptom and the people who has fix salary is the most harm. In principle, the definition or meaning inflation was widely noted scientists and experts in their field. With regard to the definition or meaning of inflation in according to experts, there are some following, in according to Winardi (1995: 235) definition or meaning of inflation is the period in which the purchasing power of the Monetary Union down. Inflation can occur when the amount of money or deposits in circulation is larger than the amount of goods and services. This is often supported by the loss of public confidence in the country vis-à-vis the domestic currency, which then cause symptoms that apply to exchange money to items. According to Bodie, and Marcus (2001: 331), the definition or meaning of inflation is the value at which the price level of goods and services in general has increased. According to Weston and Copeland (1998: 250), definition of inflation is the state of the economy that experienced...
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