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

Voluntary monopoly through combinations, To eliminate competition and there...

To eliminate competition and thereby secure higher prices, firms producing a specific product can come together and make monopoly agreements. These are called as industrial combina

Central bank functions-custodian of member cash reserves , Custodian of Mem...

Custodian of Member Banks Cash Reserves As bankers bank the central bank performs several function. It keeps the cash reserves of commercial banks in the economy and thus acts

Balance of payments - reason for protection, Balance of Payments Perha...

Balance of Payments Perhaps the most immediate reason for bringing in protection is a balance of payment deficit.  If a country had a persistent deficit in its balance of paym

Equilibrium national income in a frugal economy, Equilibrium National Incom...

Equilibrium National Income in a Frugal Economy Saving and investment are examples of two categories of expenditure called withdrawals and injections.  A WITHDRAWAL is any inc

Average propensity to consume, Average Propensity to Consume The avera...

Average Propensity to Consume The average Propensity to Consume [APC] is defined as the fraction of aggregate national income which is devoted to consumption.  If consumptio

Function and importance, explain the supply function and importance of supp...

explain the supply function and importance of supply analysis in brief

Simple macro model, Using the same simple macro model we developed in Modul...

Using the same simple macro model we developed in Module 2: a.  Show what will happen to national income (GDP) if the administration implements another $100 (billion) stimulus s

What are terms included in oligopoly, What are terms included in oligopoly?...

What are terms included in oligopoly? Oligopoly includes: • The meaning of oligopoly, and why it arises • Collusion • Game theory, particularly the concept of the pris

Fall in supply - effect on equilibrium price, Fall in Supply When...

Fall in Supply When the supply falls, the supply curve shifts to the left to position S 1 S 1 .  At the initial equilibrium price P 1 , quantity supplied falls from q 1

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