Macro economic principles - Inflation

Seite 1

Demand-pull Inflation / Increase in AD [CHECK ANSWERS]

Definitions

Demand-pull inflation: Increase in AD causing price level to increase.

AD: Total demand in economy

Increase in real GDP: Economic growth

Net exports: Export receipts minus import payments

Investment: Firms borrowto pruchase captial goods.

Increase in price level: Inflation

a) If any component of Aggregate Demand increases, then Aggregate Demand increases and the entire cuvre shifts to the right. The new curve lables AD2. As a reuslt of the increase in Aggregate Demand the Price Level increase from PL1 to PL2; this is inflation. Inflation that occurs as a reuslt of an increase in Aggregate Demand is called Demand pull inflation. Inflation aggregate demand are L_________ using D________ line, A________ and L_______.

b. Identify which of AD would increase by placing a tick in the correct box

Increase in consumer surplus --> C

Increase in investment spenidng by firms --> I

Increase in business confidence --> I

Increase in welfare benefit --> C & G

Decrease in income tax rates --> C

NZ exchange rate depreciates --> X

Increase in demand for NZ exports --> X

c. Complete the table by placing a tick in the correct columc. T = true. F = false.

A decrease in interets rates results in a decrease in consumer spending as savings increase. --> F

Business confidence decrease when interest rates increase. --> T

Demand for NZ exports increases whent he NZ dollar appreciates. --> F

Government spending increases when state sector employees get a pay rise. -->??

Consumer confidence increases when house prices increase. --> F

Increased migration to NZ causes consumer expenditure to increase. --> T

d, Describe why net exports increase following a decrease in the exchange rate for the NZD.

Exports become relatively cheaper to purchase in foreign markets, thus providing insentive for these markets to demand higher quantities. Thus, AD increases.

Seite 2

Cost-push Inflation / Decrease in Aggregate Supply

Definitions:

AS: Total supply in economy at a rnage of prices.

Increase in PL: Infaltion

PL: Average level of prices

Cost Push inflation: Increase in costs so prices increase to margin. AS decreases causing increase in price level.

Planned output: Future production levels

a) If an event causes most F_______ C________ of