Inflation: Get to the

Root of The Problem

Group 1: Hassan Nasru
Jing Heng
George Lim
Daniel Kwon

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In this inflationary situation, there is no real growth in the
output of the economy.
Its simply more money chasing few goods and services.

Is Inflation Good for

the Economy?

Consumers

Demand > Supply

Consumer
Demand full inflation

Consumer
Not only price
But Also GDP

Consumer
Economic Growth
The amount of currency
growth
( Advantage )
( disadvantage )

Firms

How does firms cause inflation?

Declining Productivity
Firms become less productive and this will allow
cost to rise
Labor cost is increasing
It might result in less hiring, which would
damage productivity even further
Unit labor cost = hourly
compensation/productivity

 Profit Push Inflation

For monopoly firms to be greedy, they will

maximize their profits.

Increase their total cost to protect their profit

margin, otherwise profits will fall.
Cause negative sloped demand curve, firms can
only change their selling quantity output.
Output will decrease

Cost push inflation

Caused by an increase in price of inputs, like labor,

raw materials etc
Price increase will lead to a decrease in supply.
Assuming demand constant, the increase in the
price of commodities will cause an increase in the
overall price level. This, in essence, will cause cost
push inflation

Government

Can cause inflation in two ways:

Fiscal Policy (Politically-induced)
Monetary Policy (Feds decisions)

Government: Fiscal
Policy
Excessive/Lavish Spending (Discretionary &
Mandatory)

Includes all government consumption, investment

and transfer payments.
More often than not, although may not be usually
the case, inflation is caused by high budget
deficit due to excessive spending.
Higher deficits lead to inflation in 3 ways:
monetary accommodation, crowding out, and
private monetization of government debt

 Taxation
Low Income Tax
Influence the households to consume more due to
an increase in disposable income and purchasing
power, thus create a rightward shift in the
aggregate demand.
High Tax on Goods and Services
Causes price indices to rise and overall price level
to increase, thus creates inflation

Government: Monetary
Policy

The Federal Reserves are in control of the supply

of money in the market.

Excessive money supply can spur inflation.

However, too often the central banks are

politicized, causing inflation to incur unnecessarily.

Some of the monetary tools that can cause

inflation are discount rates, open market
operations, and reserve requirements.

Effects of Money
Supply

Classical and neoclassical economists have

argued that money supply is directly
proportional to price level, therefore came out
with two theories: Fisher Equation (MV=PT) &
Cambridge Cash Balance(Md=kPY)

Assuming all variables except money supply(M)

and price level(P) remain constant, an increase
in M could lead to an increase in P.

Predominant examples are hyperinflations that

happen in Hungary, Zimbabwe, Austria and etc.

Conclusion
Producers - increase price to raise profit
levels or to respond to higher import prices

Consumers - increase their spending

and reduce their saving raising AD

Governments - increase the money

supply ,lower direct taxation and run budget
deficits and raise indirect

Conclusion

Our take is that government is most

influential in causing inflation, given many
empirical evidence that was collected from
the past: Germany hyperinflation, US 1970s
stagflation and such, and the influence it has
over consumers and firms.

To avoid inflation, central banks have to be

independent and government has to be
painstaking while implementing fiscal &
monetary policies

Works Cited
"Causes of Inflation."Economics Help. Web. 1 July 2015.
Cheah, C. S. "GST Need Not Lead to Higher Inflation All The
Time."Bloomberg TV Malaysia. 16 Apr. 2015. Web. 1 July 2015.
Humphrey, Thomas. "The Quantity Theory of Money: Its Historical
Evolution and Role in Policy Debates." Federal Reserve Bank of
Richmond. Web. 1 July 2015.
Miller, Preston. "Higher Deficit Policies Lead to Higher Inflation."
Federal Reserve Bank of Minneapolis. Web. 1 July 2015.
Rother, Philipp. "Fiscal Policy and Inflation Volatility." European
Central Bank. Web. 1 July 2015.
Sill, Keith. "Do Budget Deficits Cause Inflation." Web. 1 July 2015.