Macroeconomics Part 2 Essay Example | Topics and Well Written Essays - 1500 words

Macroeconomics crack up 2 - Essay ExampleDemand sop up ostentation is caused by a rise in entireness pick up which means persistent rightward shifts in the amount of money demand curve. The rise in aggregate demand may occur due to rises in consumer demand, in the level of government expenditure, in enthronization by firm, in foreign residents demand for the countrys exports or a combination of these foursome (Sloman 1997). Demand pull swelling is usually linked to a booming economy. When the economy is in recession, demand pull inflation tends be low. However, when the economy is near the peak of the business cycle, demand pull inflation is likely to be high. The graph above illustrates the rise in aggregate demand by a rightward shift in the aggregate demand curve, from AD1 to AD2. Prices rise from P1 to P2 and proceeds rises from Q1 to Q2 resulting in inflation. On the other present is the cost push inflation where high costs force firms to increase their prices (Gilles pie 2001). Aggregate supply is the derive amount of goods and services produced at a given price level in an economy. When there is a fall in the aggregate supply of goods and services caused by an increase in the cost of production, cost-push inflation occurs.Cost-push inflation essentially means that prices have rose by an increase in the costs of any of the four f interpretors of production that is labor, capital, land or entrepreneurship given that firms are already managing at maximum capacity. With increase costs and maximized productivity, firms cannot sustain profit margins by producing the same quantity of goods and services. Consequently, the increased costs are borne by consumers, causing an upward shift in the general price level. The graph above shows the amount of output that can be attained at the given price level.As production costs escalate, aggregate supply falls from AS1 to AS2 (given production is at maximum capacity), causing the prices to increase from P1 to P2 and total output to drop-off from Q1 to Q2. Demand pull and cost push inflation can occur together, since price rises can be caused both by increases in aggregate demand and by independent causes pushing up costs. quasi(prenominal) is the case with the UKs economy. The UK Consumer Prices Index (CPI) annual inflation rate went up to 4.5% in April, from 4% in March (BBC 2011). As always, there are elements of both types of inflation in the UKs economy. With the ongoing retrieval and a slight increase in demand, there is a small level of demand pull inflation. However, the majority of the effect is cost-push. The increase in VAT is one of the major reasons of inflation in this economy, as well as increases in non-discretionary items such as fuel, utilities, housing and food. These are all necessities whose price hikes act more like an additional tax. The figure below shows the change in the UKs annual quarterly rate of inflation over the last 15 years. b) Keeping inflation down to a plummy moderate level is an important contributive factor to sustain economic growth. This is because it serves as an incentive for increase output, investments and unemployment. A rapid rate of inflation disrupts regular economic life leading to a wider income gap, move output and unemployment. However, the remedy for such inflation depends on the cause. Therefore, government must diagnose its causes before implementing policies. political relation policies may pull the rate of inflation down through contractionary fiscal and monetary policies. Monetary insurance covers government changes in either the supply of