Inflation And The Trade Cycle

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Inflation

Demand-Pull Inflation

Caused by an increase in the general level of economic activity

  • The trade cycle is at its boom phase

  • Aggregate demand may rise above aggregate supply

  • Labour is at full employment, and factories are at full capacity

  • So higher demand can't be met by more supply - so firms put the prices up on those they can supply i.e Inflation

Cost-Push Inflation

Caused by a general increase in costs of production

This can come from:

  • Higher wages demanded by workers

  • Commodity prices (eg oil) increase

  • Home currency weakens - so imports become more expensive

Inflationary gap

If demand exceeds capacity (full employment) there is what we call... an inflationary gap

  • This type of Inflation can be reduced by shifting the demand curve left

Inflation
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