This means that consumers will spend some of their income on consumption goods. This will give rise to further increase in expenditure. Ceteris paribus an initial rise in autonomous investment produces a more than proportionate rise in income. The rise in income will increase investment to meet the increase demand for output. The Keynesian also points out that as the economy is inconsistently unstable there is the need for government to intercede to make the economy stable when necessary.
I have looked at a range of aspects involved with inflation and what the costs to the economy are when the scenarios are different, hyperinflation, sustained low inflation etc. and I conclude that inflation will always have some costs if it is both high and low, but higher inflation, which could lead to hyperinflation has more costs to the economy and therefore causes a greater economic problem.
Stiglitz argues that the NAIRU is used as a theory to understand the causes of inflation (predicting the changes in inflation rates) and is important because it enlightens the relation between unemployment and increasing inflation. The NAIRU corresponds to the rate of unemployment which is consistent with an unchanging inflation rate, and further reflects how the economy behaves out of equilibrium. Unless employment is at equilibrium level, inflation will increase or decrease until it reaches the NAIRU, the level of output and employment at which inflation is constant. In fact, Stiglitz explains that when unemployment is below the NAIRU, real wages demands are greater than the amount firms are willing to pay. At equilibrium, the behavior of wage-setters is compatible with that of the price-setters.
Therefore, inflation occurs. When overall price level rose, consumers will start to plan to purchase more goods before the price rise even higher. Almost every consumer will purchase commodities in order to prevent buying the same product with a higher price in future. This will worsen the demand- pull inflation where the aggregate demand is more than the aggregate supply. Besides, if the government
The Sticky-Wage Model In this model, economists pursue the sluggish adjustment of nominal wages path to explain why it is that the short-run aggregate supply curve is upward sloping. For sticky nominal wages, an increase in the price level lowers the real wage therefore making labor cheaper for firms. Cheaper labor means that firms will hire more labor, and the increased labor will in turn produce more output. The time period where the nominal wage cannot adjust to the changes in price level and output signifies the positive sloping aggregate supply curve. • The nominal wage is set by the workers and the firms based on the target real wage, which may or may not be the labor supply & demand equilibrium, and on price level expectation.
To maintain the same standard of living, one has to pay more. Due to the rise of prices, one has to fork out more money for the same goods and services that they use before the inflation. Financial planning also becomes difficult as the value of money decreasing with the rising
Let’s say if government decides to lower tax from the income, which is going to increase the income of the people, and give them greater purchasing power. And unless if it’s in a deflation/recession period, people to consume more goods and services, which will shift AD to right. As you see graph 1, assuming the country is producing in a full-employment level, the increase in consumption is going to shift AD2 is going to shift right to AD3, and cause inflation as there will be a bigger competition between the consumers to economy’s limited output/AS. And because of high competition, the price is going to rise drastically, P2 to P3, but cause output to rise only small bits, Y2 to Y3, because since it was already in a level of full employment, producers found it hard to hire more workers. As an example, if Korea decides to lower the tax, then Koreans are going to spend their income on consuming gold immediately instead of saving it.
Demand pull inflation:- If demand is increasing faster than prices of supply products increases. This usually happens in that country which has high economy. 2. Cost pull inflation When prices of companies goes up they seek to increase the prices of products in order to maintain profit margins. Peoples always complains that prices are increase but they don’t realize that wages are also increasing.
Upon seeing long of people waiting for the product, sellers either hike the price or bring in more supplies if it were possible. If more suppliers are brought, equilibrium price goes back to normal. If supply cannot be increased, sellers increase the price of the product or service. In an efficient market, price increase brought about by a crisis of otherwise is natural. Due to surge in demand, people cannot get the same product at the original price during shortage.
Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern. In order to understand what inflation targeting is and how it affects us, it is important to first establish what, in fact, inflation is. Inflation can be defined as an increase in the general price level of goods and services. It is measured as the annual percent change in the prices of goods deemed necessary for life in that country. These goods are included in a "market basket" which changes infrequently, so this measure can reflect fluctuations in the price level as well as the purchasing power of the Rand.