Clarification of Cost-Push Inflation
"Inflation can effect from a decrement in aggregate supply. The two major sources of decrement in aggregate supply are
• An increment in wage rates
• An increment in the prices of raw materials
These sources of a decrement in aggregate supply function by increasing costs, and the resulting inflation is known as cost-push inflation
Other things residual very similar, the higher the cost of manufacture, the smaller is the amount produced. At a specified price level, rising wage rates or rising costs of raw materials for example oil lead firms to decrease the amount of labor employed and to cut production."
Aggregate supply is the "the entire value of the goods and services created in a country" or just factor 2, "The supply of goods". The supply of goods can be prejudiced by factors other than an increase in the cost of inputs (say a natural disaster), so not all factor 2 inflation is cost-push inflation.
Clarification of Demand-Pull Inflation
"The inflation ensuing from an increment in aggregate demand is well known as demand-pull inflation. Such inflation may occur from any individual factor that amplifies aggregate demand, but the major ones that generate ongoing enlarges in aggregate demand are
1. Increment in the money supply
2. Increment in government purchases
3. Increment in the cost level in the rest of the world
The three the majority reasons of an increase in aggregate demand will also tend to increase inflation:
1. Increment in the money supply This is just factor 1 inflation.
2. Increment in government purchases The increased stipulate for goods by the government causes factor 4 inflation.
3. Increment in the price level in the rest of the world Suppose you are living in the United States. If the cost of gum rises in Canada, we should wait for to see less Americans buy gum from Canadians and more Canadians buy the cheaper gum from American sources. From the American perspective the demand for gum has risen sourcing a price rise in gum; a factor 4 inflation.
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