There are two types of inflation:
- Demand Pull - When demand for a product is excesive and forces firms to
increase the prices of their pruducts in high demand.
- Cost Push - When the expense of factors of endowment
increase resulting firms cost of production increasing.Forcing
the firm to increase prices to keep a profit margin.
Discuss the consequences of inflation
+ Inflation due to economic growth shows that an economy is expanding.
+ Demand pull inflation attracts investment from firms enable to supply for the
+ Better than deflation
- Increases the price of exports, exporting becomes less competetive.(reducing
- Increases the ability to import (reducing GDP)
- Inflation stimulates a viscious cycle of inflation (costs UP, prices UP, wages UP)
- Structeral unemployment - Long term unemployment according to lack of
investment or skills.
- Seasonal unemployment - According to the seasons e.g hotels, theme parks
- Frictional unemployment - The unemployed in between changing jobs.
- Cyclical unemployment - Linked to economic cycle - recession jobs are lost,
booms jobs are created.
Discuss the consequences of the unemployment
+ Increases pool of workers to choose from.
+ Increases employment competitiveness between unemployed.
+ Stops AD from growing faster than LRAS - keeping growth sustainable.
- Increase in crime.
- Increase in government spending - oportunity cost.
- Econonmy not working at full capacity