Question

In this module, you have learned that inflation is caused by “bring[ing] money supply and money demand into balance” (Chapter 21). Two types of inflation not discussed in the text are cost-push inflation and demand-pull inflation.

To complete the Discussion activity, write a post that answers the following questions:

• Find a video to learn about cost-push inflation and demand-pull inflation:
• Write a discussion post that answers the following questions:
  • Describe each of these two types of inflation.
  • Do you believe that inflation can only be controlled by increasing productivity? Why or why not?
  • What unique factors in the 1970s era caused widespread inflation? Explain.

Answer 1

Q.1 Describe each of these two types of inflation.

Answer: Cost-Push Inflation, implies rise in prices of crucial inputs such as petroleum product, wages of labor etc. A depreciation in the exchange rate of an economy (Higher import cost) also lead to cost-push inflation. In all such situations, firm raise prices of its products to insure their profit margins.In the cost-push inflation, rise in price level is associated with a fall in aggregate output. It is shown in below figure:

Demand-Pull Inflation, implies rise in aggregate demand. Rise in aggregate demand results, rise in the price level. Therefore, this type of inflation is known as demand pull inflation. In such situation, existing supply of goods and services is not sufficient to fulfill the higher level of aggregate demand. Demand pull inflation results in rightward shift of aggregate demand curve. It is shown in below figure:

Q.2 Do you believe that inflation can only be controlled by increasing productivity? Why or why not?

Answer: Inflation can be controlled by increasing productivity. However, increasing productivity is not the only way to control inflation. There are many ways to control inflation such as, in the case of cost-push inflation supply side policies will be more effective to control inflation.on the other hand, monetary policy and fiscal policies can be used to control inflation in the case of demand-pull inflation.

Q.3 What unique factors in the 1970s era caused widespread inflation? Explain.

Answer: In 1970s there was excess demand for goods and services,which create the situation of demand pull inflation. The existing supply of goods and services is not sufficient to match the demand of goods and services in the 1970s era. As we all know, when the money in an economy is raising more rapidly than its output, always create inflation in any economy and this was exactly happened in the 1970s era.

Apart from that, cost-push inflation was also responsible for widespread inflation in the 1970s era. what actually happened is, firms increase price of its product due to increase in the price of crucial raw material. It includes rise in the prices of labor wages, petroleum product etc.  As the price of raw material increases, its reflected by rise in the general price level.