Causes of Inflation and Deflation Essay
The essay will describe causes of inflation and deflation and explain how they can affect the corporate sector.
1. INTRODUCTION DEFINITION OF INFLATION AND DEFLATION
Inflation is a process in which the price level is rising and money is losing value. (Parkin, Powell, Matthews p654)
Inflation tends to rise when at the current price level, demand for goods and services in the economy are greater than economy's ability to produce goods and services.
The graph below shows continuously growing inflation, occurred by a rising price level.
If the price level is …show more content…
*Demand Pull inflation occurs when total demand for goods and services exceeds total supply. This type of inflation happens when there has been excessive growth in aggregate demand such as: increase in the monetary supply, increase in government expenditure or increase in exports.
Demand-pull inflation is often monetary in origin - because the authorities allow the money supply to grow faster than the ability of the economy to supply goods and services. The phrase that is often used is that there is "too much money chasing too few goods".
DEMAND PULL INFLATION An increase in aggregate demand shifts the AD curve from AD1 to AD2. This results in a new equilibrium where inflation rises to P2 and output to Y2.
Inflation has been pulled up by an increase in aggregate demand.
*Cost push inflation
The main causes of cost push inflation are:
Rising imported raw materials or by a fall in the value of the pound in the foreign exchange markets or increase in the money wage rates.
An increase in output prices, such as rise in wage rates or the cost of raw