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

Simon satisfying behaviour model, Q. Simon satisfying behaviour model? ...

Q. Simon satisfying behaviour model? The behavioural approach as developed in particular by Richard Cyert and James G. March of the Carnegie School, lays emphasis on explaining

Inhabitants of the city , The city of Cabernet is very popular for its prod...

The city of Cabernet is very popular for its production of wine. The inhabitants of the city have an aggregate demand for wine that can be described as follows: where Q d

Calculate the marginal costs and output ranges, Assume that input prices ar...

Assume that input prices are constant at r = 1, w = 1, with technology which consists of 5 processes having the following properties: Process Inputs Capital (machine hours)

Theory of demand, when the data is descrete and incremental changes is meas...

when the data is descrete and incremental changes is measurable, what is it?

Identity economics, McDonalds has been operating in many Asian countries su...

McDonalds has been operating in many Asian countries such as China, Singapore and Japan. However, McDonalds has yet to open its ?rst restaurant in Vietnam, a country with over 80 m

Define the term forecasting, Define the term forecasting As the term 'f...

Define the term forecasting As the term 'forecasting' may appear technical, planning for future is a critical aspect of managing any business or anorganisation.  The long-term

Classification of taxes, CLASSIFICATION OF TAXES Taxes can be classifi...

CLASSIFICATION OF TAXES Taxes can be classified on the basis of: a.     Impact of the taxes It means on whom the tax is imposed.   On the other hand, incidence of the

Expected utility, (Only for extra credit) Consider Freddy on a rainy Thursd...

(Only for extra credit) Consider Freddy on a rainy Thursday afternoon after losing in his favorite video game. His friend Tommy comes over to cheer him up and offers him the follow

Direct taxes, DIRECT TAXES A direct tax is one where the impact and ...

DIRECT TAXES A direct tax is one where the impact and incidence of the Tax is on the same person e.g. Income Tax, death or estate duty, corporation taxes and capital gains

Unit elasticity of supply, Unit Elasticity of Supply Supply is said to...

Unit Elasticity of Supply Supply is said to be of unit elasticity if changes in price bring about changes in quantity supplied in the same proportion.  Thus, when price rises,

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