Tutorial 11

Mcoecncs (Em ON110) Tutoil 11 1. C 2. B 3. A Long Answer 1) (i) Demand Pull inflation is when aggregate demand is greater than aggregate supply of goods and services at a particular general price level. (ii) Cost push inflation is when aggregate supply rises above aggregate demand at a particular price level. This can also be seen as an increase in the input costs with the absence of an equivalent increase in aggregate demand.+ (i) Keynesian’s believe that demand pull inflation is caused by an increase in aggregate demand. The increase in aggregate demand coupled with an incapability to meet this demand forces prices of outputs to rise and because of competition among agents for inputs the price of inputs also rises. Money supply will not affect inflation, instead inflation will result in a change in money supply because a change in aggregate income. (ii) Monetarists believe that inflation is solely determined by an excessive growth in money supply. Since Monetarists believe money supply is wholly controlled by monetary authorities, inflation is also determined primarily by the monetary authorities. (i) Wage push inflation is when unions demand for an increase in nominal wages that may be greater than the current inflation. Since wages rise, the input costs of the employer rises and thus a rise in output prices must result to compensate for the loss. The increase in output prices will cause inflation to rise. (ii) Profit push ...