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Demand pull vs  Cost pull inflation
Demand pull inflation <ul><li>level of aggregate demand grows faster than the underlying level of supply. Eg. our capacity...
AD = C + I + G + (X-M) where C is consumer expenditure, I is investment, G is government expenditure, X is exports and M i...
An increase in aggregate demand could therefore be because <ul><li>consumers are spending more, </li></ul><ul><li>because ...
Classicals view <ul><li>'laissez-faire' economy. </li></ul><ul><li>Unemployment (a surplus of labour) wages fall more labo...
 
Keynes view <ul><li>Talk to a Classical economist, and they will advise </li></ul><ul><li>'Don't just do something, sit th...
 
Non-inflationary economic growth Price level Real GDP (AY) AS 1 AD O p O 1 AS increases to match AD growth AS AD 1
AD/AS model (cost-push) Price level Real GDP (AY) AS AD O p p 1 O 1 Contributes to stagflation AS 1
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12680 l.n. ppt. types of inflation

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12680 l.n. ppt. types of inflation

  1. 1. Demand pull vs Cost pull inflation
  2. 2. Demand pull inflation <ul><li>level of aggregate demand grows faster than the underlying level of supply. Eg. our capacity grows at 3%, but demand grows faster, </li></ul><ul><li>' too much money chasing too few goods ', </li></ul>
  3. 3. AD = C + I + G + (X-M) where C is consumer expenditure, I is investment, G is government expenditure, X is exports and M is imports
  4. 4. An increase in aggregate demand could therefore be because <ul><li>consumers are spending more, </li></ul><ul><li>because interest rates have fallen, </li></ul><ul><li>taxes have been cut or simply because there is a greater level of consumer confidence. </li></ul><ul><li>It could be because firms are investing more in the expectation of future economic growth. </li></ul><ul><li>It could be that the government is boosting spending on defence, health, education and so on. </li></ul><ul><li>Or it could be because there is a boom in India’s exports to overseas. Whatever it is, it will be inflationary if demand grows faster than supply. </li></ul>
  5. 5. Classicals view <ul><li>'laissez-faire' economy. </li></ul><ul><li>Unemployment (a surplus of labour) wages fall more labour is employed full-employment is restored. </li></ul><ul><li>Any attempt by the government to boost aggregate demand in the long run using reflationary policies will simply be inflationary as it will shift the AD curve straight up a vertical AS curve. </li></ul>
  6. 7. Keynes view <ul><li>Talk to a Classical economist, and they will advise </li></ul><ul><li>'Don't just do something, sit there!' </li></ul><ul><li>While a Keynesian will advise </li></ul><ul><li>'Don't just sit there, do something!' </li></ul>
  7. 9. Non-inflationary economic growth Price level Real GDP (AY) AS 1 AD O p O 1 AS increases to match AD growth AS AD 1
  8. 10. AD/AS model (cost-push) Price level Real GDP (AY) AS AD O p p 1 O 1 Contributes to stagflation AS 1

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