Macroeconomics: Assignment B

Running head: ASSIGNMENT B 1
MACROECONOMICS: ASSIGNMENT B
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ASSIGNMENT B 2
Question3
a.
i. Demand-pull Inflation
Demand-pull inflation results in an economy when an imbalance occurs between a
nation’s aggregate demand and aggregate supply. It results when a nation’s aggregate demand
increases by a greater margin as compared to the nation’s aggregate supply (Ascari & Sbordone,
2014). Demand-pull inflation is coupled with a nation’s economic growth. As the economy
grows more job opportunities arise as firms employ more employees to cater to the nation’s
increased demand and hence this leads to a decrease in unemployment. The following diagram is
used to illustrate demand-pull inflation.
Due to stronger consumer demand in an economy which makes aggregate demand to
exceed aggregate supply, producers in an economy reach a maximum production point whereby
they are unable to produce more output to satisfy the increased aggregate demand sufficiently.
This makes the aggregate demand curve to shift towards the right direction from point AD1 to

ASSIGNMENT B 3
AD2 and this makes the nation’s general price for products to rise from P1 to P2 and this leads to
demand-pull inflation.
ii. Cost-push Inflation
Centrally to demand-pull inflation, cost-push inflation in an economy results from a
nation’s aggregate supply decrease (Totonchi, 2011). When firms reach their maximum
production level in an economy, they may face increased production costs. Therefore they may
end up gaining little profit when they produce more output at this level. This makes them cut
their production volume as more production leads to just little profit gain. This leads to a shift in
the aggregate supply curve towards the left direction from point AS1 to AS2. This makes the
nation’s general price for commodities to rise from P1 to P2 causing cost-push inflation in the
nation as shown in the diagram below.
b.
i. Demand-pull Inflation Causes

ASSIGNMENT B 4
Consumers’ expectations of prices for goods and services to increase in the future: This
makes consumers buy more goods and services to avoid future higher prices. As a result
aggregate demand increases while the aggregate supply decreases and this leads to an increase in
prices.
A rise in the income level of consumers: When consumers have more income, they
increase their spending. This increases their demand and hence makes a nation’s aggregate
demand to increase at a faster pace as compared to aggregate supply. This leads to a price rise.
Cost-push Inflation Causes
A rise in employees’ salaries: When employees’ salaries are increased either by trade
unions or other labor organizations in a nation, employers pass the salary increment burden to
final consumers inform of increased prices. This leads to cost-push inflation as it increases
producers’ production costs which are paid by the final consumers.
A rise in profit margin for companies: An increase in profit margin for companies makes
them increase commodities prices. This leads to cost-push inflation as it is classified under
production costs which are met by the final consumers.
Question5
a.
When the firm managers improve their skills in selling and marketing, they are able to
convince more customers to buy the firm’s products. This raises the companies’ sales as the
demand for their products increases. The increase in sales leads to an increase in production
volume. As a result, a nation’s economic activity is improved as more output is produced. The