Consequences of Inflation

Consequences of Inflation

1. DD-pull inflation

   • Caused by ↑ AD
     • Low & stable inflation
       • ↑ EG, ↑ Emp
         • ↑ Mat SOL
       • ↑ FDI
         • ↑ PG
         • BOP improves
     • High inflation
       • ↓ FDI
         • ↓ PG
         • BOP worsens

2. Cost-push inflation

   • Caused by ↓ SRAS
     • ↓ EG, ↓ Emp
       • ↓ Mat SOL
     • ↑ Unit COP
       • ↓ FDI
         • BOP worsens
         • ↓ PG

3. Relatively cheaper M

   • ↓ (X-M)
     • BOP worsens

4. Wage Px spiral

   • Worsen inflation

5. Worsen Y inequality

   • Strong vs weak trade unions
   • Fixed vs variable Y earners