Macro economic principles - Inflation

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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.

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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