power and authority
Q.1 Define Inflation?
Ans. Inflation is a condition, when cost of services coupled with goods rise and the entire economy seems to go haywire. Inflation has never done good to the economy. Inflation and economic growth are parallel lines and can never meet. Inflation reduces the value of money and makes it difficult for the common people.
Causes of Inflation
1. Demand Pull Inflation
If the economy is at or close to full employment then an increase in AD leads to an increase in the price level. As firms reach full capacity, they respond by putting up prices leading to inflation
AD can increase due to an increase in any of its components C+I+G+X-M
The link between output and inflation suggests that there will be a similar link between inflation and unemployment,
The Phillips curve initially showed a link between money wages and unemployment, it was then argued an increase in wages would lead to inflation
2. Cost Push Inflation
If there is an increase in the costs of firms, then firms will pass this on to consumers. There will be a shift to the left in the AS.
Cost push inflation can be caused by many factors
1. The Labor Market
If trades unions can present a common front then they can bargain for higher wages, this will lead to wage inflation.
2. Import prices
One third of all goods are imported in the UK. If there is a devaluation then import prices will become more expensive leading to an increase in inflation
E.G. a German car costs DM 40,000. If the exchange rate is DM £1:3DM then it will be priced at £13,333.
If the E.R falls to £1 : 2DM then it will be priced at £20,000
3. Raw Material Prices,
The best example is the price of oil, if the oil price increase by 20% then this will have a significant impact on most goods in the economy and this will lead to cost push inflation.
E.g. in early 2008, there was a spike in the price of oil to over $150 causing a rise in inflation
4. Profit Push Inflation
When firms push up prices to
Ans. Inflation is a condition, when cost of services coupled with goods rise and the entire economy seems to go haywire. Inflation has never done good to the economy. Inflation and economic growth are parallel lines and can never meet. Inflation reduces the value of money and makes it difficult for the common people.
Causes of Inflation
1. Demand Pull Inflation
If the economy is at or close to full employment then an increase in AD leads to an increase in the price level. As firms reach full capacity, they respond by putting up prices leading to inflation
AD can increase due to an increase in any of its components C+I+G+X-M
The link between output and inflation suggests that there will be a similar link between inflation and unemployment,
The Phillips curve initially showed a link between money wages and unemployment, it was then argued an increase in wages would lead to inflation
2. Cost Push Inflation
If there is an increase in the costs of firms, then firms will pass this on to consumers. There will be a shift to the left in the AS.
Cost push inflation can be caused by many factors
1. The Labor Market
If trades unions can present a common front then they can bargain for higher wages, this will lead to wage inflation.
2. Import prices
One third of all goods are imported in the UK. If there is a devaluation then import prices will become more expensive leading to an increase in inflation
E.G. a German car costs DM 40,000. If the exchange rate is DM £1:3DM then it will be priced at £13,333.
If the E.R falls to £1 : 2DM then it will be priced at £20,000
3. Raw Material Prices,
The best example is the price of oil, if the oil price increase by 20% then this will have a significant impact on most goods in the economy and this will lead to cost push inflation.
E.g. in early 2008, there was a spike in the price of oil to over $150 causing a rise in inflation
4. Profit Push Inflation
When firms push up prices to