Macroeconomics

Annotations:

• Inflation

1. Inflation
   1. Cost Push Inflation
      1. Occurs when firms experience a rise in costs and respond by increasing prices to protect profit margins
         1. Costs may rise for the firm because:
            1. 1) Increase in Raw Materials (due to increase in prices of internationally traded commodities)
            2. 2) Increase in wages, when they rise higher than productivity
            3. 3) Fall in exchange rates, meaning that imports are more expensive
            4. 4) Higher Indirect Taxes: e.g. Alcohol duty, VAT, depending on price elasticity of demand, the produces will try to put this onto the consumer
      2. Illustrated by a shift in the SRAS curve inwards
      3. Many causes of cost-push inflation come from external shocks such as unexpected volitility in commodity prices traded internationally
   2. Inflationary Pressure can come from Domestic and External sources Demand and Supply side of the economy
   3. Demand Pull Inflation
      1. Occurs when aggregate demand and output is growing at an unsustainable rate - Leading to increased pressureon scarce resources and a positiv ouput gap
      2. When there is excess demand in the economy producers are able to raise prices and achieve higher profits because demand is running ahead of supply
      3. Demand pull inflation becomes a threat when economy experiences a strong boom with GDP rising fster than the long run trend growth of GDP
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