distinguish between demand pull inflation and cost push inflation explain with the help of Phillips curve the trade off between the inflation rate and unemployment rate
Answers
What is Inflation?
Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods. Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s currency.
Understanding Inflation
As prices rise, a single unit of currency loses value as it buys fewer goods and services. This loss of purchasing power impacts the general cost of living for the common public which ultimately leads to a deceleration in economic growth. The consensus view among economists is that sustained inflation occurs when a nation's money supply growth outpaces economic growth.
To combat this, a country's appropriate monetary authority, like the central bank, then takes the necessary measures to keep inflation within permissible limits and keep the economy running smoothly.
Inflation is measured in a variety of ways depending upon the types of goods and services considered, and is the opposite of deflation which indicates a general decline occurring in prices for goods and services when the inflation rate falls below 0 percent.
KEY TAKEAWAYS
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
Inflation is classified into three types: Demand-Pull inflation, Cost-Push inflation and Built-In inflation.
Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
Inflation can be viewed positively or negatively. Individuals with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets. People holding cash may not like inflation, as it erodes the value of their cash holdings.
Ideally, an optimum level of inflation is required to promote spending to a certain extent instead of saving, thereby nurturing economic growth.
Causes of Inflation
Rising prices are the root of inflation, though this can be attributed to different factors. In the context of causes, inflation is classified into three types: Demand-Pull inflation, Cost-Push inflation and Built-In inflation.
Melissa Ling {Copyright} Investopedia, 2019
Demand-pull inflation occurs when the overall demand for goods and services in an economy increases more rapidly than the economy's production capacity. It creates a demand-supply gap with higher demand and lower supply, which results in higher prices. For instance, when the oil producing nations decide to cut down on oil production, the supply diminishes. It leads to higher demand, which results in price rises and contributes to inflation. Additionally, an increase in money supply in an economy also leads to inflation. With more money available to individuals, the positive consumer sentiment leads to higher spending. This increases the demand, and leads to price rises. Money supply can be increased by the monetary authorities either by printing and giving away more money to the individuals, or by devaluing (reducing the value of) the currency. In all such cases of demand increase, the money loses its purchasing power.
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Answer:
Swelling is a quantitative proportion of the rate at which the normal cost dimension of a container of chose merchandise and enterprises in an economy increments over some stretch of time.
It is the consistent ascent in the general dimension of costs where a unit of cash purchases short of what it did in earlier periods.
Frequently communicated as a rate, swelling demonstrates a decline in the obtaining intensity of a country's money.