Macroeconomic Problems (Inflation) ("Causes of Cost-Push…
Macroeconomic Problems (Inflation)
A situation where there is a continuous or persistent and rapid increase in the general price level (consumer price index)
A situation of too much money chasing after too few goods
A situation of chronic excess AD over AS (AD>AS)
Measures of inflation
Inflation rate =
Excess aggregate demand (AD) over AS at near pull employment level of output
INCREASE AD,output INCREASE (less employment) if (more employment) cannot response to AD INCREASE by INCREASE output
they respond to AD INCREASE by INCREASE price
"Causes of demand-pull inflation"
INCREASE in money supply > INCREASE AS if aggregate supply does not INCREASE proportionately, the price level will INCREASE > inflation.
original eq = at point A, where P= P1 & Q=Y
When production cost INCREASE > (AS) DECREASE > shift (AS) to the left from AS1 to AS2.
AS result gen.P.level INCREASE from P1 to P2 > cost-push inflation.
"Causes of Cost-Push Inflation"
AD INCREASE in price of imported goods (imported inflation)
Desire for more profits > AS DECREASE to INCREASE prices (profit-push inflation)
INCREASE production cost due to INCREASE wagers (wages-push inflation)
A sudden DECREASE in as due to unfavorable climate conditions or other unforseen circumstances (supply-shock inflation)
"Effects of Inflation"
Trade union and wages
Inflation encourages trade union to demand higher wages to compensate the INCREASE living cost
Savings and Investment
Inflation INCREASE savings of businessman because of more profits, but DECREASE the savings of consumers because of INCREASE living cost
Inflation and international trade
Balance of trade
Inflation = INCREASE prices of domestic products including exported products
Inflation will make prices of import relatively cheaper in domestic product/markets > imports INCREASE as import INCREASE,export DECREASE.
If Malaysia has a deficit in the BOP (imports > exports) as result of inflation > demand for RM DECREASE
Measures to reduce inflation
Implementation of contractionary or tight monetary policy
Measures armed directly at the root of cause the problem.
Implementation of surplus or budget or contractionary policy