Understanding Inflation and Macroeconomics

This assignment provides a detailed analysis of inflation and macroeconomics, exploring the concepts of cost push and demand pull inflation. It delves into the effects of inflation on economies, including the increase in price levels and decrease in consumers' disposable income. The assignment also touches upon macroeconomic theories, such as open economy macroeconomics and the impact of shadow banking on economies. With a list of references to various books, journals, and online sources, this assignment is a valuable resource for students looking to understand the fundamentals of inflation and macroeconomics.

ECONOMICS

Table of Contents
INTRODUCTION...........................................................................................................................1
PART B............................................................................................................................................1
Question 2 (a) ..............................................................................................................................1
Question 2 (b) .............................................................................................................................2
Question 2 (c)...............................................................................................................................2
Question 3 (a)...............................................................................................................................2
Question 3 (b)..............................................................................................................................4
Question 4 (a)...............................................................................................................................5
Question 4 (b)..............................................................................................................................5
Question 4 (c)...............................................................................................................................6
Question 5 (a)...............................................................................................................................6
Question 5 (b)..............................................................................................................................8
Question 5 (c)...............................................................................................................................9
Question 5 (d)............................................................................................................................10
Question 6 (a).............................................................................................................................10
Question 6 (b)............................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Economics refers to the science that studies human behaviour. It shows relationship
between extremity and scarce resources that have alternative uses. This deals in distribution,
production and consumptions of products and services. This is study that make people
understand about how to use limited resources in the best possible manner. Macroeconomics
refers to subdivision of economics that study an economy as whole at national and global level.
Its participants are the individuals and firms. It put emphasis on aggregate changes of economy
like growth rate, unemployment and gross domestic products.
PART B
Question 2 (a)
Final goods and services - This refers to end goods that are ultimately used for consumption
instead of producing some another goods.
Intermediate goods and services - This refers to semi finished goods which are just partially
finished. It is used to produce some another products and services.
i) Windscreen purchased from motor vehicle spare parts supplier is Intermediate good because
windscreen its just a glass screen which is used at front of the motor vehicle it is not said to be a
final product because eventually it used in producing a car, motorcycle or truck. The ultimate
product will be motor vehicle not a windscreen.
ii) A new bulldozer which is used by a construction company is an Intermediate good because it
is used to push large quantiles of sand, soil or rubble during construction work. Thus, bulldozer
is used to do construction actives it will not refer as a final good (Uribe and Schmitt-Grohé,
2017).
iii) A household cleaning service purchased by a family from a domestic cleaning service
company called as Final service because household cleaning service ultimately fulfils the family
needs. The family use this service for fulfil their cleaning purpose. Thus, it refers to be final
service.
iv) Coking coal is considered as the intermediate good as it is not the final product, it is used for
electricity generation or steel production.
1

Question 2 (b)
The economy produces final goods and services with a market value of $800 billion in a
particular year but only $750 billion worth of goods and services is sold to domestic or foreign
buyers. The nation GDP will be consider as $800 billion because Gross domestic product is
defined as monetary value of final goods and services that are produced in the country's
boundary in a specific given year. Therefore, nation's GDP is $800 billion in total.
Question 2 (c)
The new truck sold for use by a transport company is a final good, even though it is a
fixed investment used to produce other goods because as a whole truck is considered to be final
product for a manufacturing company of trucks (Piazzesi and Schneider, 2016). The ultimate
product they sold to customer is a truck it is not a spare parts used in manufacturing.
Yes, the value of this truck then be added to Gross Domestic product because for the
trucks manufacturing company it is considered as to be a domestic product which they produce
within a country' economy and it has monetary value too. Therefore, it ultimately adds value to
nation's GDP.
Question 3 (a)
Difference between demand-pull and cost-pull inflation
Demand-pull inflation
The Demand Pull inflation arises due to strong demand of consumers. The reason for
inflation is that aggregate demand for goods and services increases. The increase in demand
leads to pull up the price levels at high. Thus, it creates inflation (Piazzesi and Schneider, 2016).
The aggregated demand is more than aggregate supply that make increase in prices of goods and
services in country's economy. The firm hirer more labour workforce because of increase in
demand the production capacity increases. Therefore, there is increase in employment.
2

From the above diagram it is seen that AD1 curve shifts to AD2 due to increase in
purchasing power of consumers they are demanding more goods. The AS curve of supply is at
rise due to price of goods increases. The firm is producing more units of goods in order to meet
the current demand of consumers.
Cost-push inflation
The Cost push inflation arises when there is decrease in supply of goods and services. It
occurs when cost of production is at rise and this eventually, impacts the price levels. The cost of
production increases due to various factors such as increase in prices of wages, indirect taxes and
raw materials in the country's economy (Wray, 2015). This cost ultimately passes on to
customers in terms of increased prices of products. It also affects the employment due to
decrease in Gross domestic product. Thus, it creates inflation and demand for goods and services
got decreased. This makes companies to lay off their workforce and this leads to decrease in
employment rate.
3
Illustration 1: Demand pull inflation
(Source : Cost push inflation demand pull inflation, 2019)

The above diagram shows that due to increase in cost of production the AS curve shifts to
the left from AS1 to AS2 and P2 means that price level shifts to upward. This indicates that
there is increase in price level because of Cost push inflation. The Gross domestic products also
decreases because of higher cost of production.
Question 3 (b)
Causes of Demand pull inflation
 Consumption - The increase in consumption capacity of goods and investment which is
done by the firms leads to increase in aggregate demand.
 Exchange rate - If rise in price of imports and decrease in foreign prices of exports. This
turns to buy fewer imports by the consumers. Thus, the exports grows and leads to
increase in aggregate demand (Uribe and Schmitt-Grohé, 2017).
 Government spending - Increment in government spending will result in increase in
demand of goods and services in the country's economy.
 Monetary growth - Increase in disposable income of consumers leads to increase in
price levels of goods and services.
4
Il
lustration 2: Cost push inflation
(Source : Cost push inflation demand pull inflation, 2019)

Causes of Cost Push inflation
 Supply stock - The price of raw materials got increased this impacts the production cost
of firms. The price of goods and services got increased.
 Rise in Labour units - The price of wages got increased which leads to increase in
manufacturing costs of goods.
 Higher tax rates - The firms are occurring higher indirect taxes which leads to increase
in cost of goods. Thus, the GDP rate also decreases.
 Rise in import costs - There is deprecation in exchanges rates which results into higher
prices of imported products.
Question 4 (a)
Macroeconomics policy - This refers to policy of whole nation that is concerned with fiscal,
monetary, trade and exchange rate conditions. It includes taxes, borrowing and government
spending. It defines the monetary and credit rules.
Unemployment - It refers to the situation in which people are job less. The number of jobs
available for people are less than number of jobs applied for.
No, I don't think that macroeconomics policy should be designed to achieve a measured
unemployment rate of zero. The rate of unemployment could never be zero (Uribe and Schmitt-
Grohé, 2017). It can be below the current rate but cannot be at zero level. It reflects the number
of people who are searching for the jobs and number of jobs which are available for them to be
offer. The number of jobs which are offered by the government can't be equal to the number of
job seekers. Thus, it is merely impossible to achieve measured rate of zero.
Question 4 (b)
Long run unemployment - It refers to the typical situation of unemployment in which people
are jobless for more than 27 weeks.
Classical economists interpreted long run unemployment in this way -
According to Adam smith the unemployment rate which is stable in country's economy
for a long period is known as Long run unemployment. This arise due to various factors such as
changes in labour markets and government regulations in country's economy.
According to Argy and Nevile, (2016), the long run unemployment occurs due to shifts in
the labour demand curve and downward trend of wages in nation's economy.
5

Question 4 (c)
Structural unemployment - This refers to the situation of unemployment when there is
technological retardation in any of the industrial firm. This makes jobs of workers and labour
obsolete. This impact unemployment in negative term (Romer, 2016). Through up-gradation of
technological the need of workforce get reduces in the firm this results in loss of jobs.
Cyclical unemployment - The cyclical unemployment refers to the situation of workers that are
jobless because of downswing in business cycle. It occurs due to consumers demand get
decreased. Thus, the business revenues get decreases and the firms lay off their workforce to
maintain their profit levels, this results in decrease in unemployment rate.
Difference between structural and cyclical unemployment
Structural unemployment occurs when there is change in industry's structure. This arises
due to up-gradation of technology in particular firm happens. The need of workforce in that
particular company get decreased. Thus, it results in lay off of workers and they become jobless.
Cyclical unemployment arises when there is change in business cycle (Piazzesi and
Schneider, 2016). This could be because of decrease in demand or inflationary situation in
nation's economy. It is caused by recession. The purchasing power of consumers get reduce and
firm is occurring high losses. This results in loss of jobs.
The policy makers should highly concern about these types of the unemployment. This
leads to decrease in the per capita income of an individual and also affects the exchange rate of a
country.
Question 5 (a)
Aggregate demand - It is sum total of quantity demanded. This indicates the overall demand of
products and services within an economy.
Law of demand - The law of demand says that demand of goods and services increases due to
decrease in price and demand of goods and services falls due to rise in price (Nakamura and
Steinsson, 2018).
Aggregate supply - It is the sum total of quantity supplied. This determines the total number of
goods and services sold by the firms within a country.
Law of supply - The law says that keeping other factors constant supply of goods and services
increases with rise in price whereas supply decreases with a fall in price.
6

The improvement in the marketing and selling skills of firm managers will increase the
aggregate supply and aggregate demand of goods and services
Figure 1. Aggregate Demand Increases
(Source : Sang's Economics Blog, 2019)
The above diagram shows that the AD curve shifts towards rightward from AD1 to AD2.
This shows increase in demand. The aggregate supply also increases due to improvised
marketing skills of managers.
7

Question 5 (b)
The increase in personal income tax will decrease the aggregate demand of products and
services (Moreira and Savov, 2017). The purchasing power of consumers get reduced due to
increase in income tax.
Figure 2. Aggregate Demand Decreases
(Source : Sang's Economics Blog, 2019)
The demand curve shifts to leftward from AD1 to AD2. The quantity demanded for the
goods also shifts to Q1 to Q2 which means consumers are demanding less. There is sightly
decrease in demand due to increase in income tax. The disposable income of consumers got
deceased due to rise in income tax.
8

Question 5 (c)
The increase in exports will lead towards increase in aggregated supply of goods and
services.
The Aggregate supply increases in above illustration where supply curve shifts to
rightward from AS1 to AS2. The quantity supplied is also increased from Q1 to Q2. The increase
in exports will increase the aggregated supply but as a result price rises and aggregated demand
decreases for the domestic goods.
9
Illustration 3: Aggregate supply increases
(Source : Sang's Economics Blog, 2019)

Question 5 (d)
A significant destruction in an economy's capital stock because of war will create the
inflation in country's economy (Krueger, Mitman and Perri, 2016). Due to which aggregated
supply got decreases.
Illustration 4: Aggregate supply decreases
(Source : Sang's Economics Blog, 2019)
The Aggregate supply decreases due to recession in the economy. The supply curves
shifts to leftward from AS1 to AS2. The capital stock of country's get reduces, the manufacturer
doesn't have enough raw materials to produce goods due to economic crisis. Thus, it results in
decrease in supply.
Question 6 (a)
Consumer price index - This helps to measure the changes in the price levels in the marketplace
(Johnson, 2017). This is weighted average of the total numbers of goods and services buy by the
consumers. It is statistical tool that estimates the prices of representative items in a sample.
Advantages of Consumer price index in Australia
 It helps to track monthly changes in the prices levels of the goods and services.
10

 It has the consistency and flexibility. The average costs of consumers goods remains
constant (Heijdra, 2017).
 Influence is the strength of consumer price index as it helps to calculate both equity and
fixed income in the market.
 It helps to measure the costs of goods from the cost of living.
Disadvantages of Consumer price index in Australia
 There is problem of structure while calculating consumer price index due to consumer
spending is depended on income (Ghysels, 2016).
 There is problem of price measurement over various range of products. It makes difficult
for calculation of CPI.
 It is hard to make choice of weights.
 At the time of calculating consumer price index there is situation of confusion while
making choice for base year.
Question 6 (b)
“Some people lose from inflation while some people win from inflation.”
Inflation - The increase in price value of goods and services in country's economy and fall in
purchasing power of consumers said to be inflation.
Some people loose from inflation because price levels are at boom. The consumer
spending get reduces. The consumers cannot not afford the prices of goods and services which
are offered to them (Agénor and Montiel, 2015). There is loss of disposable income of
consumers. The suppliers are occurring high cost of production due to rise in prices of raw
material. Thus, the increase costs of raw material will eventually shift to prices of end product
which makes consumers suffered.
Some people wins from inflation because at the time of inflation the business are
encouraged to undertake capital expenditure (Fuchs-Schündeln and Hassan, 2016). The real cost
of debt get reduces. The central bank is also bound to offer nominal interest rates. The value of
money supply artefact the growth in country's economy.
11

CONCLUSION
It has been concluded from the above project report that aggregate demand refers to the
sum total of quantity demanded whereas aggregate supply means total number of quantity
supplied. It has been summarised that demand of goods increases with the fall in prices and
demand of goods decreases with the rise in prices. The supply of goods and services rises with
the increase in price level whereas supply of goods and services decreases with the fall in prices.
It has been summarises that inflation refers to increase in price levels within a country's economy
and decrease in consumers disposable income.
12

REFERENCES
Books and Journals
Agénor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton University Press.
Argy, V.E. and Nevile, J., 2016. Inflation and Unemployment: Theory, Experience and Policy
Making. Routledge.
Fuchs-Schündeln, N. and Hassan, T.A., 2016. Natural experiments in macroeconomics.
In Handbook of macroeconomics (Vol. 2.pp. 923-1012). Elsevier.
Ghysels, E., 2016. Macroeconomics and the reality of mixed frequency data. Journal of
Econometrics.193(2).pp.294-314.
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.
Krueger, D., Mitman, K. and Perri, F., 2016. Macroeconomics and household heterogeneity.
In Handbook of Macroeconomics (Vol. 2.pp. 843-921). Elsevier.
Moreira, A. and Savov, A., 2017. The macroeconomics of shadow banking. The Journal of
Finance.72(6).pp.2381-2432.
Nakamura, E. and Steinsson, J., 2018. Identification in macroeconomics. Journal of Economic
Perspectives.32(3).pp.59-86.
Piazzesi, M. and Schneider, M., 2016. Housing and macroeconomics. In Handbook of
macroeconomics (Vol. 2.pp. 1547-1640). Elsevier.
Romer, P., 2016. The trouble with macroeconomics. The American Economist.20.pp.1-20.
Uribe, M. and Schmitt-Grohé, S., 2017. Open economy macroeconomics. Princeton University
Press.
Wray, L.R., 2015. Modern money theory: A primer on macroeconomics for sovereign monetary
systems. Springer.
Online
Cost push inflation demand pull inflation. 2019. [Online]. Available through :
<https://www.myassignmenthelp.net/cost-push-inflation-and-demand-pull-inflation>.
Sang's Economics Blog. 2019. [Online]. Available through :
<https://sangecon.wordpress.com/tag/float/>.
13