Examples of demand-pull inflation in the following topics:
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- Inflation is a persistent increase in the general price level, and has three varieties: demand-pull, cost-push, and built-in.
- Demand-pull inflation is inflation that occurs when total demand for goods and services exceeds the economy's capacity to produce those goods.
- Put another way, there is "too much money chasing too few goods. " Typically, demand-pull inflation occurs when unemployment is low or falling.
- Unlike demand-pull inflation, cost-push inflation is not "too much money chasing too few goods," but rather, a decrease in the supply of goods, which raises prices .
- Demand-pull inflation is caused by an increase in aggregate demand.
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- If unemployment is high, inflation will be low; if unemployment is low, inflation will be high.
- The Phillips curve is the relationship between inflation, which affects the price level aspect of aggregate demand, and unemployment, which is dependent on the real output portion of aggregate demand.
- As aggregate demand increases, unemployment decreases as more workers are hired, real GDP output increases, and the price level increases; this situation describes a demand-pull inflation scenario.
- Moreover, the price level increases, leading to increases in inflation.
- At the initial equilibrium point A in the aggregate demand and supply graph, there is a corresponding inflation rate and unemployment rate represented by point A in the Phillips curve graph.
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- As unemployment rates increase, inflation decreases; as unemployment rates decrease, inflation increases.
- When the unemployment rate is 2%, the corresponding inflation rate is 10%.
- As unemployment decreases to 1%, the inflation rate increases to 15%.
- Given a stationary aggregate supply curve, increases in aggregate demand create increases in real output.
- With more people employed in the workforce, spending within the economy increases, and demand-pull inflation occurs, raising price levels.
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- These actions lead to an increase or decrease in aggregate demand, which is reflected in the shift of the aggregate demand (AD) curve to the right or left respectively .
- Changes in any of these components will cause the aggregate demand curve to shift.
- It boosts aggregate demand, which in turn increases output and employment in the economy.
- Since government spending is one of the components of aggregate demand, an increase in government spending will shift the demand curve to the right.
- A contractionary fiscal policy is implemented when there is demand-pull inflation.
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- When inflation falls below this range, the Fed would lower interest rates and raising the money supply in order to push inflation up.
- Proponents of inflation targeting argue that a volatile inflation rate has negative effects for an economy.
- This increase in demand leads to higher prices, causing more inflation.
- This decrease in demand causes producers to sell their goods at lower prices, and the cycle continues.
- Argue that central banks should maintain inflation targets, Argue that central banks should not maintain inflation targets
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- To do so, it engages in expansionary economic activities and increases aggregate demand.
- As aggregate demand increases, inflation increases.
- They will be able to anticipate increases in aggregate demand and the accompanying increases in inflation.
- As such, they will raise their nominal wage demands to match the forecasted inflation, and they will not have an adjustment period when their real wages are lower than their nominal wages.
- The transition at point B does not exist as workers are able to anticipate increased inflation and adjust their wage demands accordingly.
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- In the long run, inflation and unemployment are unrelated.
- When unemployment is above the natural rate, inflation will decelerate.
- If the government decides to pursue expansionary economic policies, inflation will increase as aggregate demand shifts to the right.
- As aggregate demand increases, more workers will be hired by firms in order to produce more output to meet rising demand, and unemployment will decrease.
- According to the theory, the simultaneously high rates of unemployment and inflation could be explained because workers changed their inflation expectations, shifting the short-run Phillips curve, and increasing the prevailing rate of inflation in the economy.
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- By contrast, a monetary authority will pursue a contractionary monetary policy when it considers inflation a threat.
- This will cause high levels of inflation.
- Thus, contractionary monetary policy causes aggregate demand to fall, thereby reducing the rate of inflation. .
- The graph shows the relationship between the money supply and the inflation rate.
- By controlling the money supply, monetary authorities hope to influence the rate of inflation.
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- In economics, the demand for money is generally equated with cash or bank demand deposits.
- The equation for the demand for money is: Md = P * L(R,Y).
- The interest rate is adjusted to keep inflation, the demand for money, and the health of the economy in a certain range.
- Data regarding money supply is recorded and published because it affects the price level, inflation, the exchange rate, and the business cycle.
- Expansionary policy is used to combat unemployment, while contractionary is used to slow inflation.
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- Disinflation is a decline in the rate of inflation; it is a slowdown in the rise in price level.
- In Year 2, inflation grows from 6% to 8%, which is a growth rate of only two percentage points.
- Suppose that during a recession, the rate that aggregate demand increases relative to increases in aggregate supply declines.
- The expected rate of inflation has also decreased due to different inflation expectations, resulting in a shift of the short-run Phillips curve.
- This is an example of inflation; the price level is continually rising.