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chapter 7 - Coggle Diagram

- - - - SEVERE inflation
        
        creates a lot of uncertainty and is seen as an increase risk and may be deterred from investing. fall in investment causes AD to fall and leads to lower level of output and employment in the economy. (short run)
        
        rate of capital accumulation is reduced so growth in productive capacity is lower --> affect long term potential growth of economy
      - MILD inflation
        
        stimulates investment as rate of returns on investment increases thereby leads the economy to higher level of output and employment
    - - menu costs of inflation: need to constantly reprint menu cost due to frequent adjustment of prices
      - shoes-leather cost: time and efforts that taken to counteract the effects of inflation
    - - inflation erodes the purchasing power of money and reduce economic welfare of households and tend to worsen income inequality
  - - - prevents decline in standard of living, encourages savings
    - - increase profitability: firms can make long terms plans as prices are certain. firms will also invest of improve productivity
      - greater efficiency: fall in menu costs/ sheos-leather cost
    - - certainty of future prices stimulate investment --> economic growth --> fall in unemployment --> improvement in balance of payment
- - - - import price push: increase in cost of imported inputs will increase cost of productions hence fall in SRAS
      - increase in structural rigidities: supply side rigidities (in the form of contracts, some agreements) prevent the efficient reorganisation of resources to meet the changes in demand for good and services
      - wage push: presence of trade unions who are able to demand higher wages in excess of productivity growth --> higher unit cost of production, leading to fall in SRAS (not applicable in singapore BUT a wage spiral can also occur: workers observe that price of good increase, demand for higher pay to maintain their purchasing power and if the employers accede to their demand, will have to set higher prices to compensate for higher wage bills --> further price increases and spiralling upwards of the general price level
      - currency depreciation (applicable in sg): weaker currency makes imported raw material expensive, thereby leading to higher costs of production
      - supply-side shocks: natural disasters/ epidemics can affect the availability of factors of production within an economy and hence output of economy
      - profits-push (applicable to monopoly supplier): large firms can set high prices INDEPENDENT of consumer's demand to increase profits. this leads to increases prices at different stages of production, thereby leading to higher costs of production and higher general price level