Question

Macroeconomic

Inflation Cycles (Study Plan 12.2) 2. U.S. Inflation Rises at Faster Pace With the consumer price index rising at a faster pace, President-elect Donald Trump wants to slash taxes and boost infrastructure spending, which could cause inflation to rise further. Source: Washington Post, January 19, 2017 Explain what type of inflation the news clip is describing and provide a graphical analysis of it. Use the following figure to work Problems 3 to 5. The economy starts out on the curves labeled AD and SASo LAS SAS SAS 230 SAS N 190 150 110- AD2 AD1 ADo 9 70 16 18 20 22 Real GDP (trillions of 2009 dollars) 0

Answer 1

The news clip is describing demand - pull inflation. It means that as the demand of the commodities rises, the sellers would increases the price of their commodities in order to earn higher revenue and thus the demand pull inflation takes place. As there is a tax slash , more disposable income would be in the hands of the people and thus their spending rises leading to a rise in the demand. Infrastructure spending would lead to a rise in the demand of the construction materials and thus the price rises.

As the demand of any commodity rises, the price of the commodity increases and thus there is a demand pull inflation.