c




   

 


 

 
 

c

   !

" #  


 


$
    
 


%
  
" 

" & 

    


'

Inflation and its causes

Inflation refers to a rise in prices that causes the purchasing power of a nation to fall. Inflation is a normal economic
development as long as the annual percentage remains low; once the percentage rises over a pre-determined level, it
is considered an inflation crisis.

There are many causes for inflation, depending on a number of factors. For example, inflation can happen when
governments print an excess of money to deal with a crisis. As a result, prices end up rising at an extremely high
speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards
because of a high demand.

Another common cause of inflation is a rise in production costs, which leads to an increase in the price of the final
product. For example, if raw materials increase in price, this leads to the cost of production increasing, which in turn
leads to the company increasing prices to maintain steady profits. Rising labor costs can also lead to inflation. As
workers demand wage increases, companies usually chose to pass on those costs to their customers.


 

 (  )

  


The SRAS and SR Phillips curves reflect fixed costs (a condition of the economic short run). The SRAS curve shows
that production can be increased in the short-run by increasing employment. The short-run Phillips curve shows the
effect on the inflation rate of that increase in employment. The LRAS curve reflects the level of output that can be
sustained given "full" employment, regardless of the price level. TheLR Phillips Curve reflects the fact that the "full"
level of employment is dependent on the natural rate of unemployment, which is also independent of the price level.
So, in sum, the short run curves reflect the fact that the price level does factor into economic decisions in the short
run while the long run curves show that the most important aspects of the economy, employment and production, are
independent of the price level over the long run.

Aggregate supply in the text books is written Price and Output, and output in term is synonymous with employment.

The Philips curve is unemployment and the change in the price level, so you can see the two are similar.
If you think that the economy is at equilibrium, then an increase or decrease in output is really an increase or
decrease in unemployment, and the two curves are simply a mirror of each other - one is in levels the other is in
changes.

Both curves have the same philosophy at their root - that an increase in aggregate demand increases output and
prices in the short run, but only increases prices in the long run. The most popular explanation - which is not entirely
discredited is that wages lag behind prices so that an increase in prices reduces the real wage. Firms then expand
output until labor realizes it has been had, and pushes for higher wages.p

%
 

 "
    

 
  
 

  
 

In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate
of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of inflation.
While it has been observed that there is a stable short run tradeoff between unemployment and inflation, this has not
been observed in the long run.

 c
  *
 
 

ë
 

  


G
 r

›

r       
  
 
      
 
 
  
  


r 
 
 
  
   

         

  ››     !
" #  
       

O
 O 

   
   
 

 

$
›› %
 & '
  %  r     
  
 


()* 
  

 
      
(+*
 
    

  


(,*  
  
   %    
 $

  
  % 
  $)     -      

  ) .   
   

   "

 
O 





@ 
    
   

     
  

@ %

      
    


@  

  %


     
 % 

 
% / 
 
 %   % 

   




@ 
 
      %
 0"1
  (     

 *

@   % 

  



@ %

    
        % 
 2   
 % 

 %"3" 4 %)3) / 
 % %       %

 
   % 


GOO
 O 
 



@ / 
  %  %
      

@ $
  %    
    % %
    
%r


   % 
    %

@ %
          
  
   

 
 
       






 
  O  r        
    

)*    ë  


+*  
   ë   

,* 

 
     


5*  %
  %  
   %  
        
   %
   " %   
  % 

  .    

 
   
    

6*      
  $    %
   % 

% 

   
  % %










 

7
   
       
    

#     

 $
 -      

 "  + 
 
    
  ë 
 
    

18 



  

 


%
      
   -    % 

 
     
   %   
 .
    % 


$"  $+    % 
 
 
 .   
  
 

 1     %          
  
 
       
 

= › 
›

()* /    

9r    17 !         .

  



    
  
(+* 08
 
r  
  
 !
     
% 

     

(,* # 
     

9       :
(5* #     
8


 
    


/    

9 
       17 !      
% 17 !   

 
 

O    
 
 
› %
 
  
    

 %

      %
     



  


.
 
 
           

@ $
      
  "  + %  


 
 0" 
0+
@ / 

       
 "  ) %  
 
 

 9"  9)
@ .
   


 
  
  

     

% 
 

   
 %   
 7
 
  
 

          
 
           
 

@  
%         % 

 
   


 $"  $)    % 


%



 +r ;     

$ 
  %
   %
& <         
% 
 
  
 














 
  › 

 
r / 
 
 
 
  




7   


     
  %     !   
    
      
   %   0 
%           





 





   

 $    
 

 %  %    

 
 7   

  
  % 
 
  

    
  = %    
%   
 
 r  

  
    
  .
›  
  ›  

› 
›  

=  ( 
* 
  ;0
 
  
    
   (
* 
 
 
   !      !  .


 
 !   

 
 
 
  
   

  
  




r    
 

  
     

 ë  /
      ;0 %        %  
  
      
  7  
  (    
 

 >
  
 * # %           %  
  ( 
*   ;0 

    

      
  0  


 
    

%   

 .


 

     
  ;0       
   
%

 
 

$ %    ;0   %   &



 

 
 
 

ï   

G

  
  
 
    
   

(  + &

   
   

  
 
 
 
 c

  

 
     


 

)