FACULTY OF BUSINESS

PROFESSIONAL SCHOOL OF ACCOUNTING

Macroeconomy

AUTHOR:

Villanueva Obregón, Evelyn Pamela (0000-0002-5238-3109)

TEACHER:

Dr. Diaz Dávila Marlon

CHIMBOTE – PERÚ

2023
Tabla de contenido
INTRODUCTION ................................................................................................................................... 3
DEVELOPMENT .................................................................................................................................... 4
Inflation concept: ............................................................................................................................ 4
Inflation on the demand side: ......................................................................................................... 4
Supply-side inflation: ....................................................................................................................... 4
REFERENCES ........................................................................................................................................ 5
 INTRODUCTION
Understanding the causes behind the movement of prices in the economy is relevant
for all agents in the economy. Private agents make decisions based on prices in the economy,
so knowing their evolution adds value. Similarly, for central banks it is important to predict
the development of inflation in the short and long term in order to face inflationary pressures
by adjusting their monetary policy when necessary.

In a market economy, the prices of all goods and services are subject to various

changes. These changes, which can be categorized based on their amplitude or according to

the origin of said phenomenon, contribute to an increase in the instability of the economies

and particularly of the real income of families. In this sense, the central banks and monetary

institutions of different countries have as their main objective to stabilize the general level of

prices by adopting various strategies, both short and long term. (Abarca, 2017, p.9)

In this sense, one of the best-known authors in the academic field De Gregorio
(2007) who defines inflation as the upward movement of the general level of prices, explains
that this phenomenon is directly related to the concept of the value of money. This
relationship has also been extensively studied by Friedman (Argandoña, 2018), and for this
author the variation in the general level of prices is also subject to the interest rates of
alternative assets to money, the expectations of the agents, the inter-temporality of the income
generated and the alternative use they make of it. Therefore, this author concludes that, in the
long term, inflation is a strictly monetary phenomenon.
 DEVELOPMENT
Inflation concept:
The Central Reserve Bank of Peru (2018) states, "inflation is the persistent increase
in the general level of prices in the economy, with the consequent loss of the purchasing
power of the currency. It is generally measured through the variation of the consumer price
index” (p.104).

It should be noted that the increase in the price of a single good or service is not
considered inflation. To understand the phenomenon of inflation, it is necessary to distinguish
between a one-time rise and a persistent rise in prices. As well as between inflations
according to their severity, that is, if inflation is high or if it is hyperinflation. (Poroma, 2015,
p.17)

Inflation on the demand side:

That is, demand inflation occurs when the total of goods and services that are
demanded in an economy exceeds the total of goods and services that such economy
generates. What is known in economics as excess demand arises. Sooner or later, this excess
demand will put pressure on prices, causing a general increase in them. Therefore, if the
suppliers of goods and services, that is, the companies, do not manage to increase their
production, prices will rise (Fortun, 2020. Párr. 7).

Supply-side inflation:
Efforts by central banks to contain high and rising inflation are hurting growth and
threatening to send the global economy into recession. However, the immediate cause of the
current inflationary pressures is a large and persistent imbalance between supply and demand.
Higher interest rates will reduce demand, but supply-side measures must also play an
important role in inflation-containing strategies. Throughout the past year or so, the
deployment of pandemic containment measures simultaneously caused an increase in
demand and a contraction in supply. While this was to be expected, supply has proven
surprisingly inelastic. For example, in labor markets, shortages have become the norm,
causing flight cancellations, disruptions in supply chains, restaurant closures, and challenges
to healthcare delivery (Spence, 2020. Párr. 11).
 REFERENCES
Abarca, A. (2017). Pass-through effect of the nominal exchange rate on the level of imported
inflation in the Peruvian economy, during the period 2000-2016. Lima, Peru: César Vallejo
University. https://repositorio.ucv.edu.pe/handle/20.500.12692/2330

Argandoña, A. (2018). The economic thought of Milton Friedman. Barcelona : Business

School. University of Navarra. https://media.iese.edu/research/pdfs/DI-0193.pdf

Central Reserve Bank of Peru. (2018). Inflation Report. December 2018. Lima.
https://www.bcrp.gob.pe/docs/Publicaciones/Reporte-Inflacion/2018/diciembre/reporte-de-
inflacion-diciembre-2018.pdf

Poroma, D. (2015). The seigniorage dynamics of the Central Bank of Bolivia. Analysis of
the period 2001 - 2013. La Paz: Universidad Mayor de San Andrés.
https://repositorio.umsa.bo/handle/123456789/5747

Fortún, M. (January 7, 2020). Demand inflation. Economipedia.com

https://economipedia.com/definiciones/inflacion-de-demanda.html

Spence, M. (2020). The fight against inflation, from the supply side. The Economist.
https://www.eleconomista.es/opinion/noticias/11858015/07/22/La-lucha-contra-la-
inflacion-desde-el-lado-de-la-oferta.html