Macroeconomics

Macroeconomics

1. Inflation

   • Cost Push Inflation
     • Occurs when firms experience a rise in costs and respond by increasing prices to protect profit margins
       • Costs may rise for the firm because:
         • 1) Increase in Raw Materials (due to increase in prices of internationally traded commodities)
         • 2) Increase in wages, when they rise higher than productivity
         • 3) Fall in exchange rates, meaning that imports are more expensive
         • 4) Higher Indirect Taxes: e.g. Alcohol duty, VAT, depending on price elasticity of demand, the produces will try to put this onto the consumer
     • Illustrated by a shift in the SRAS curve inwards
     • Many causes of cost-push inflation come from external shocks such as unexpected volitility in commodity prices traded internationally
   • Inflationary Pressure can come from Domestic and External sources Demand and Supply side of the economy
   • Demand Pull Inflation
     • Occurs when aggregate demand and output is growing at an unsustainable rate - Leading to increased pressureon scarce resources and a positiv ouput gap
     • When there is excess demand in the economy producers are able to raise prices and achieve higher profits because demand is running ahead of supply
     • Demand pull inflation becomes a threat when economy experiences a strong boom with GDP rising fster than the long run trend growth of GDP
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