Causes of inflation, Microeconomics

Causes of inflation:

Excessive growth in wages relative to productivity can cause inflationary pressures. This causes aggregate demand to increase relative to aggregate supply and pulls up prices level.

Government sector causes.Changes such as an increase in government expenditure can produce an increase in the price level in the economy via increased aggregate.

Price shocks. These are substantial increases in the prices of some items, for example, due to drought, floods, or massive oil price hike. These increases in the prices of these items may feed into cost of production. Aggregate output may fall and given the aggregate demand the price level is pushed up.

Excessive growth in money supply relative to the level of production in the economy.This causes the level of aggregate demand in the economy to increase relative to aggregate output, shortages occur and the price level rises.

Changes in exchange rate. If the external value of the domestic currency falls relative to other nations’ currencies this may be inflationary. Under this circumstance imported goods become more expensive and this may add to domestic cost and price structure in the economy fuelling inflation.

Fall in Output. Due to war, natural disaster or even high cost output can fall and supply constrained relative to demand.

Posted Date: 1/3/2013 12:31:38 AM | Location : United States







Related Discussions:- Causes of inflation, Assignment Help, Ask Question on Causes of inflation, Get Answer, Expert's Help, Causes of inflation Discussions

Write discussion on Causes of inflation
Your posts are moderated
Related Questions

Individual Assignment ECO101 - PRINCIPLES OF ECONOMICS electronic submission via Moodle 6 Questions 100 marks (15% of total course) All questions should be attempted. 30-50 w

price of laptop increases by 20% and there is a 40% drop in the quantity demanded?


International Comparisons Method In the 1960s, a few developing countries of the world looked around the developed world in search of models of development. For instance, Sout


Business Meeting Etiquette: Before meetings, the correct way to arrange a meeting is to take an appointment 3 to 4 weeks before, even though it is known that generally gatherings w

The production function for a firm is expressed as follows: Q = 800K - K 2 +5KL - 7750L + 10,000 Where Q is quantity of units manufactured, K and L are units of capital and

In theory, we know that a monopolist basis its price directly off of the demand curve, but in practice a monopolist cannot ''see'' the demand curve. Explain how a monopolist might

How to solve questions of endowments?