Therefore two objectives have been met. However, the diagram also shows a conflict. With higher AD there is also demand pull inflation.The extent of any economic growth depends on the elasticity of the AS curve. If there is a small output gap and a more inelastic AS curve then the impact on economic growth will be smaller but there will be more inflation. This is unlikely to be the case in the UK at the moment as low interest rates and a large budget deficit has not cause significant inflation.
In theory, a devaluation could cause inflation for 3 reasons. Firstly, there is likely to be an increase in AD. (AD = C+I+G+X-M), if exports are cheaper there will be more exports sold and the quantity of imports will fall. If the economy is close to full capacity then higher AD will cause inflation. However, increased AD may not cause inflation, it depends on various factors: If the economy is in recession and there is spare capacity a rise in AD will not cause inflation.
Introduction Because it is particularly hard to distinguish the causes for or elements that lead to the state of inflation, numerous theories and conceptions have been presented for same intention. All these theories attempt to elucidate the supply and demand elements that effect in the formation of the situation of inflation. In this assignment, I will discuss two theories of inflation and its economic effects and will analyze how both theories will help in raising overall national income in the era of economic recession and unemployment. 1. Keynesian Theory 2.
The definition shows that in a nation which has a trade surplus, there is more demand for the exports of a country than there is demand for foreign products and services. Therefore, there is a higher employment rate within the country and the standard of living is increased. Positive balance of trade plays an important role in the economic growth of any country. Not only the level of employment, but the trade surplus can also affect the price level and inflation rate in the nation. As the demand for a country’s goods and services increase, producers increase their output to meet the increased demand.
Autumn Assignment- Demand and Price Elasticity of Demand Part A Price elasticity of demand is a measure of the sensitivity of demand for a product to changes in its price. (Evan Davis et.al. 2003) An elastic demand means that the quantity demanded is responsive to changes in price; inelastic meaning that the quantity demanded is unresponsive to changes in price. PED can be measured by dividing the percentage change in quantity demanded by the percentage change in price. There are a number of factors effecting price elasticity of demand, the overriding determinant being the availability of substitute goods to the consumer, the more that are made available, the higher the elasticity is likely to be as buyers can easily switch from one product to another.
The law of demand tells us that an increase in price will cause the quantity demanded to decrease whereas the law of supply states that if price increases the quantity supplied increases as well. The opposite is true in both instances. Price elasticity of demand tells us how much of a change in demand arises with the fall or increase in price. Price elasticity of supply is the degree of sensitivity of production with the change in price. It is easier to measure elasticity in percentages because it allows for greater comparability.
At last, achieve aggregate demand and aggregate supply to be an ideal balance. Monetary policy is divided into two types: expansionary and tightening. Aggressive monetary policy is to stimulate aggregate demand by increasing the speed of the money supply growth. In this policy, it is easier to obtain the credit, and the interest rates will reduce. Therefore, when the aggregate demand compared with the economic production capacity is quite low, expansionary monetary policy should be taken into use appropriately.
Such policies aim to increase the capacity of the economy to produce more goods and services by increasing the quantity or quality of the factors of production. A supply-side improvement can be depicted as a positive rightwards shift of the LRAS curve (LRAS to LRAS1). Price level Real Output Y1 Y LRAS LRAS1 Price level Real Output Y1 Y LRAS LRAS1 AN1 AN1 AP1 AP1 AN1 AN1 AN1 AN1 AN1 AN1 AP1 AP1 AN1 AN1 One fiscal policy that might be used to bring about the supply-side improvement of a larger workforce is a reduction in income tax. A fall in the marginal rate of tax, for example a reduction in the additional rate of income tax from 50% to 45% for income earned above £150,000 or an increase in the Personal Allowance threshold from £10,000 to £10,500, will increase households disposable income (post-tax take home). The resultant decrease in households’ replacement ratio (disposable income out of work ÷ disposable income in work) will encourage more people to actively seek work and thus increase the participation rate (the proportion of all those of working age that comprise the labour force and in the UK this figure is 75%) and thus increase the size of the labour force.
The Output of the Firm As the demand for labour is a derived demand it is significantly dependant on the level of a firms output. There are many factors that influence the level of a firms output they are: o The general economic conditions, o The pattern of consumer demand o The demand for individual firm’s output. • General Economic conditions Aggregate demand: It refers to the total demand for goods and services within the economy. Components of aggregate demand are consumption; investment; government spending; and net exports. High rates of economic growth bring about an increase in the aggregate demand and decrease in the unemployment rate and vice versa.
However economic growth has various costs. Firstly if economic growth is unsustainable and is higher than the long run trend rate inflation is likely to occur. inf Furthermore, this temporary boom in output is unlikely to continue, and may be followed by an economic downturn or recession. Thus, it can be very damaging to increase the rate of economic growth above the sustainable rate. This boom and bust cycle happened in the UK in the late 1980s and early 1990s.