What is Inflation?
Inflation can be easily described as a maintain increase in the general level of prices. The inflation rate is measured by the percentage changes in the cost of a basket of consumer goods and services. There are two most common factors of inflation these include:
* Demand –Pull Inflation- "The inflation resulting from an increase in aggregate demand is called demand-pull inflation. Such inflation may arise from any individual factor that increases aggregate demand, but the main ones that generate ongoing increases in aggregate demand are
1. Increases in the money supply
2. Increases in government purchases
3. Increases in the price level in the rest of the world.
Example- the level of unemployment in a country declines, aggregate demand for goods and services will increase and, unless met by an increase in supply, this will result in an increase in prices.
* Cost Push Inflation- "Inflation can result from a decrease in supply. Example, when there is a shortage of supply and there is enough demand that the producer can raise prices. An increase in the cost of production will be passed on to retail prices, resulting in inflationary pressures, all else being equal. The two main sources of decrease in aggregate supply are
* An increase in wage rates
* An increase in the prices of raw materials
These sources of a decrease in aggregate supply operate by increasing costs, and the resulting inflation is called cost-push inflation.
* Built-in inflation is the result of constant demand-pull or cost-push inflation that has "built-up" in the economy over time. As a result, individuals may expect inflationary pressures to persist into the future and pre-emptively demand increased wages now. This in turn increases inflationary pressure (aka demand-push inflation) and the cycle begins again.
EXAMPLE OF INFLATION
1. Recession in the United...