ASSIGNMENT

[COMPANY NAME]  [Company address]

Table of Contents
Question 1............................................................................................................................................2
Question 2............................................................................................................................................2
The Philips Curve............................................................................................................................2
Purchasing Power Parity................................................................................................................3
Expenditures Multiplier..................................................................................................................3
Crowding-Out effect........................................................................................................................3
The Natural Rate of Unemployment..............................................................................................3
References............................................................................................................................................4

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Question 1
When there is a drop in the value of the currency over the period of time, it is referred as the inflation.
In this context, inflation has been classified as the cost-push inflation and the demand-pull inflation.
Cost-push inflation arises when the prices increase due to increase in raw material prices and
production costs. The macroeconomic policy states that the short-term cost-push inflation can convert
into long-term high inflation due to several reasons such as (Schwarzer, 2018):

 Supply shock – when there is a sudden increase in the price of essential commodities.
 Rise in wages – due to which companies are forced to increase the price of products to upkeep
the margins.
 Imported inflation and higher taxes – which results due to inflation faced by trading partners
and higher duties etc.

The second type is the demand-pull inflation and it occurs when the aggregate demand grows rapidly
as a result of which the aggregate supply is outpaced. When demand is higher than the supply, the
price of products is eventually increased. The macroeconomist view is that during economic growth,
when full employment has been achieved, price levels will increase to maximize the profits. The key
reasons of demand-pull inflation are (Singla, Ahuja & Sethi, 2017):

 Consumption – when it increases along with investment, it may result in demand pull
inflation.
 Exchange rate – when it is dropped dramatically, it will make the imports of a country
expensive resulting in demand-pull inflation.
 Spending of Government – when there is an increase in the government spending, it will also
lead to a demand-pull inflation.
 Expectations - In some cases due to an expectation of inflation can lead to a “perceived
inflation” where companies will rise the prices.

Question 2
The answer to the terms have been given as follows:

The Philips Curve

This curve was given by Sir W. Phillips, stating that there is an inverse relationship between
unemployment and the inflation rate. This simply states that a decrease in the unemployment will
result in the rise of the wages. The theory proclaims that inflation (rise in the wages) comes with a
decrease in the unemployment. For example, If the unemployment becomes high stays high with a

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stable but high inflation rate, then the Philips curve reflects the unemployment rate by shifting
(Mahmoudzadeh, Sadeghi & Sadeghi, 2017).

Purchasing Power Parity

The measurement of the prices, by the use of particular goods, in various areas, is known as the
purchasing power parity. This theory allows to compare the different purchasing power of different
currencies. Theoretically, it is an exchange rate allowing you to purchase the different services along
with the goods in every other country. For example, the ratio between the exchange rate and the price
be equal to one. For example, if the exchange rate of $1 is equal to Indian rupees 5, then the $2 should
be equal to Indian rupees 10.

Expenditures Multiplier
The measure of the change in collective production that is controlled making any alteration in
independent expenditures, which includes consumption expenditures, purchases of government, Net
export expenditures, and mainly investment expenditures, is termed as The expenditure multiplier. For
example, a new industry when installed facades this multiplier in the form of expenditure (Zayed,
Chowdhury, Kamruzzaman & Islam, 2019).

Crowding-Out effect
The concept of a situation in which the value or the requirement of personal goods or services
provided by private sector companies is declined or even some times threw out by public sector goods
and services. For example, a country tries to speed up government incomes by discouraging private-
sector business

The Natural Rate of Unemployment

The natural rate of unemployment is a collective unemployment rate based on its causes. This rate
does not harm the economy; rather, it continues in the expansion of the economy in case of an equal
balance between the labour and resource market. For example, the US have equilibrium between
labour and resource market; hence their economy is expanding.

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References
Schwarzer, J. A. (2018). Retrospectives: Cost-Push and Demand-Pull Inflation: Milton Friedman and
the" Cruel Dilemma". Journal of Economic Perspectives, 32(1), 195-210.

Singla, A., Ahuja, I. P. S., & Sethi, A. P. S. (2017). The effects of demand pull strategies on
sustainable development in manufacturing industries. International Journal of Innovations in
Engineering and Technology, 8(2), 27-34.

Mahmoudzadeh, M., Sadeghi, S., & Sadeghi, S. (2017). Fiscal spending and crowding out effect: a
comparison between developed and developing countries. Institutions and Economies, 31-40.

Zayed, N. M., Chowdhury, F. N., Kamruzzaman, M., & Islam, M. S. (2019). Factors Influencing
Purchasing Power Parity (PPP) in Bangladesh Economy: 1986-2017. Academy of Strategic
Management Journal.