Merto, Karen May B.

1, 2015

July

BEC 113- BBE

INFLATION
Inflation is a situation in the economy where, there is more money chasing less of
goods and services. In ither words, it means there is more supply/availability of
money in the economy and there are less of goods and services to buy with that
increased money. Thus goods and services command a higher price than actual as
more people are willing to pay a higher value to buy the same goods. In this
inflationary situation, there is no real growth in the output of the economy per se.
Its simply more money chasing few goods and services.

BASIC TYPES OF INFLATION

Demand-Pull Inflation

Cost-Push Inflation

Demand pull inflation places responsibility for inflation squarely on the

shoulders of increases in aggregate demand. This type of inflation results
when the four macroeconomics sectors (household, business, government
and foreign) collectively try to purchase more output that the economy is
capable of producing.
1. In terms of the simple production possibilities analysis, demand-pull
inflation results when the economy bumps against, and tries to go
beyond, the production possibilities frontier. Then end result is
inflation.
2. In the more elaborate aggregate market analysis, demand-pull inflation
results when aggregate demand increases beyond aggregate supply
creating economy-wide shortages. As with market shortages, the price
(or price level) rises. Then end result is inflation.

Cost-Push inflation places responsibility for inflation directly on the shoulders

of decreases in aggregate supply that result from increases in production
cost. This type of inflation occurs when the cost of using any of the four
factors of production (labor, land, capital or entrepreneurship) increases.
1. In terms of the production possibilities analysis, this means that the
production possibilities frontier is shrinking closer to the origin, causing
it to bump down against the aggregate demand. Then end result is
inflation.
2. In the aggregate market analysis, aggregate supply decreases to less
than aggregate demand creating economy-wide shortages. As with any
market shortages, the price (price level) rises. Then end result is
inflation.

CAUSES OF INFLATION
Inflation may be caused by an increase in the quantity of money in
circulation. This has been seen most graphically when the governments have
financed spending in a crisis by printing money excessively, often leading to
hyperinflation, where prices rise at extremely high rates. Another cause can be a

rapid decline in the demand for money as happened in Europe during the black
plague.
The money supply is also thought to play a role in determining levels of more
moderate levels of inflation, although there are differences of opinion on how
important it is.

A fundamental concept in such Keynesian analysis is the relationship

between inflation and unemployment called the Phillips curve. This model
suggested that price stability was a trade-off against employment. Therefore, some
level of inflation could be considered desirable in order to minimize unemployment.

Is Inflation Good in the Economy?

Yes and no. Yes because inflation helps producers realize better margins. This incites
them to do better and produce more. No because it reduces the buying power of the
consumer in real terms.