TYPES OF INFLATION

BY RUSYDI AND AZAN

09/25/08

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Introduction

Inflation can be defined as a continuous increase in the general price level of goods and services in the economy Inflation rate = (CPI this year-CPI previous year)/CPI previous year x 100

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Topics of Discussion
 

DEMAND PULL INFLATION COST - PUSH INFLATION

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DEMAND PULL INFLATION
 

Demand pull inflation occurs when aggregate demand exceeds the aggregate supply Demand pull inflation is commonly referred to too much money chasing after too few goods and services Rise in aggregate demand which may due to a rise in consumer demand or level of government expenditure or investment by firm or country’s exports or a combination of the four
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General price level

AS

P2 P1 P0 Increase in AD above full An increase in AD0 employment (AD1 to AD2) towards Yf (AD1 to AD2) increase price to P2 price show increase in the level (P0 to P1) Real output has reached the maximum limit but prices are still increasing AD2 AD1 AD0

0
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Yf

Real output
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COST–PUSH INFLATION

Cost-push inflation refers to an increase in the general price level associated with an increase in the cost of production Inflation occurs due to the increase in the costs or supply prices of goods caused by increase in the cost of inputs
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General price level

AS0 AS1 AS2 A further upward shift in the aggregate supply curve creates a further increase in price to P2

P2 P1 P0 AS2 AS1 AS0 0
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The equilibrium aggregate output falls from Qf to Q1 while the general price level rises from P0 to P1 AD

Q2

Q1 Yf

Real output
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Causes in the shift of AS

Wage-push inflation = wage-push inflation occurs due to an increase in the wage level which will lead to an increase in the cost of production and the output price Profit-push inflation = profit-push inflation occurs when certain producers or monopolists stock up on goods and create an artificial shortage Import-push inflation = import-push inflation occurs when the prices of imported raw materials or finished goods increase
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DAH…

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