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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.               
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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 
   excesive demand.
+ 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)

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  • Structeral unemployment - Long term unemployment according to lack of
                                               investment or skills.
  • Seasonal unemployment - According to the seasons e.g hotels, theme parks
                                              holiday resorts.
  • Frictional unemployment - The unemployed in between changing jobs.
  • Cyclical unemployment - Linked to economic cycle - recession jobs are lost,
                                            booms jobs are created.
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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

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