Case Study PB 202 Macroeconomics Inflation and Unemployement Lecturers Name : Ainiezean Awang Jual Programme : DPM 2B

Bil. 1. 2. 3. 4. 5.

Name Norhaslinda binti Muslie Elleona Ellen Paulina Foo Cha lee Syarifah Nazurah binti Samon Sharifah Siti Redzma binti Sabri

Matrix Reg. No. 07DPM13F1054 07DPM13F1064 07DPM13F1022 07DPM13F1006 07DPM13F1054

1. What is GST ? Provide a brief expalantion.

2. What is cost push inflation and how it happens ?

Cost-push inflation refers to an increase in the general price level associated with an increase in the cost of production. Cost-push inflation is the result of the sellers activities. In other words, inflation occurs due to the increase in the costs or supply prices of goods caused by an increase in the cost of inputs.

Stated in terms of aggregate demand and aggregate supply functions, the cost-push inflation arises in economy, in the absence of excess demand, due to the pressure various factors which shift the aggregate supply curve to the left, as shown in the figure 1.1

General price level

AS, AS, AS

P AS P AS AS AD Real output Q Q Q

Figure 1.1

In figure 1.1 is the full employement aggregrate output which is determined at the point of intersection of the aggregate demand curve, AD and aggregate supply curve, AS. Consequent upon the upwards shift in the aggregate supply curve from AS to AS, the equilibrium aggregate output falls from Q to Q, while the general price level rises from P to P. A further upwards shift in the aggregate supply curve from AS to AS creates a further increase in price to P. The increase in the general price level is called the cost-push inflation.

a) Wage-Push inflation Occurs due to an inflation occurs due to an increase in the wage level which will lead to an increase in the cost of production and the output price. The wage level may increase due to organized labour unions seeking further wage increase through their collective bargaining strength or the firms increasing wages to avoid the migration of workers to other firms.

b) Profit-push inflation Occurs when certain producers or monopolists stock up on goods and create an artificial shortage which will increase the price on these goods, thereby giving them higher profits.

c) Import-push inflation Occurs when the price of imported raw materials or finished goods increase. This may be due to the fluctuation of the foreign exchange rate. This may lead to an increase in production costs and eventually an increase in the price of outputs.

3. Provide your opinion on the best way to retain a healthy inflation rate.