Demand-pull inflation, Managerial Economics

Assignment Help:

Demand-pull inflation is when aggregate demand exceeds the value of output (measured in constant prices) at full employment.  The excess demand of goods and services cannot be met in real terms and therefore is met by rises in the prices of goods.  Demand-pull inflation could be caused by:

  • Increases in general level of demand of goods and services. A rise in aggregate demand in a situation of nearly full employment will create excess demand in may individual markets, and prices will be bid upward. The rise in demand for goods and services will cause a rise in demand for factors and their prices will be bid upward as will. Thus, inflation in the pries of both consumer goods and factors of production is caused by a rise in aggregate demand.
  • General shortage of goods and services. If there is a general shortage of commodities e.g. in times of disasters like earthquakes, floods or wars, the general level of prices will rise because of excess demand over supply.
  • Government spending: Hyper-inflation certainly rises as a result of government action. Government may finance spending though budget deficits; either resorting to the printing press to print money with which to pay bills or, what amounts to the same thing, borrowing from the central bank for this purpose. Many economists believe that all inflation is caused by increases in money supply.

Monetarist economists believe that "inflation is always and everywhere a monetary phenomenon in the sense that it can only be produced by a more rapid increase in the quantity of money than in output" as Friedman wrote in 1970.

The monetarist's theory is based upon the identity:

                        M x V = P x T

And thus this was turned into a theory by assuming that V and T are constant.  Thus, we would obtain the formula

                        MV = PT


Related Discussions:- Demand-pull inflation

What is the economic role of government, Q. What is the economic role of go...

Q. What is the economic role of government? What are the roles? Meaning: economic role is the role played by the government in uplifting the economy. The important roles: 1.

Show the long term goals - demand forecast, Q. Show the Long Term Goals - D...

Q. Show the Long Term Goals - Demand forecast? Long Term Goals:   If the demand forecast period is more than a year, in that scenario it's termed as long term forecast. Follow

Development of transportation and marketing facilitates, Development of Tra...

Development of Transportation and Marketing Facilitates: The expansion of an industry may expedite the development of transportation and marketing facilities that will decrease th

Why does the demand curve slope downwards, Why does the demand curve slope ...

Why does the demand curve slope downwards? As Figure above demonstrates, demand curve slopes downward to the right. Downward slope of the demand curve reads the law of demand i

Disadvantages of progressive tax, Disadvantages The effect on ince...

Disadvantages The effect on incentives High  progressive tax makes work and extra effort become less valuable. The effect on the willingness to accept risk

Dynamics of unemployment and real wages, Dynamics  of Unemployment and  ...

Dynamics  of Unemployment and  Real  Wages through Productivity Shocks   The model  that you  are  studying here  is  in  the  tradition of  the  real  business cycle theory th

Plot the demand schedule and draw the demand curve for the d, Plot the dema...

Plot the demand schedule and draw the demand curve for the data given for Marijuana in the caseabove.

Costs of unemploment and inflation, COSTS OF UNEMPLOMENT AND INFLATION   ...

COSTS OF UNEMPLOMENT AND INFLATION   In  an  economy  both  unemployment  and  inflation  have  adverse effects  and policy makers  formulate policy instruments to contain both

The position of an economic relationship, Using the relationship among the ...

Using the relationship among the price of a visit to a physiotherapist and the quantity of visits demanded, explain and distinguish between the direction, the slope, and the positi

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd