N Economics for Accounting and Finance Anees Tariq — According to Mankiw and Taylor, , inflation is an increase in the overall level of prices in the economy. Describe the main causes of inflation and the associated costs. Explain how inflation is beneficial to a country and how deflation can affect the economy of a nation. Use relevant economic theory, examples and academic literature to support your answer. Introduction The word economy is an expression from the. Inflation is caused by an imbalance of demand and supply, where prices of the goods and services increase at an ongoing pace.
Causes of Inflation and Deflation
Causes of Inflation and Deflation Essay - Words
The diagram below tracks the effect of this. We see aggregate demand rising but the economy finds it difficult to raise expand production. There is a small increase in real national output, but the main effect is to put upward pressure on the general price level. Shortages of resources will lead to a general rise in costs and prices.
Unemployment and Cost-Push & Demand-Pull Inflation
With higher production costs and productivity at it maximum, companies cannot maintain profits by producing the same amounts of goods and services. As a consequence, the increased costs are passed on to customers, causing a rise in the overall price level inflation. Demand-pull inflation occurs when there is an increase in collective demand, categorized by the four sections of the macro economy: governments, households, businesses and foreign buyers. When these four sectors at the same time want to purchase more output than suppliers can produce, buyers compete to acquire limited amounts of goods and services. Buyers then bid prices up, again and again, causing inflation.
This increase in the general price level of goods and services in an economy is inflation, measured by the Consumer Price Index and the Producer Price Index; Commonly referred to as Inflation. Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation.