Economics: Demand-pull and Cost-push Inflation, Unemployment, CPI and Winners and Losers of Inflation

This document covers topics like Demand-pull and Cost-push Inflation, Unemployment, CPI and Winners and Losers of Inflation. It includes answers to various questions related to these topics.

Running head: ECONOMICS
Economics
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Table of Contents
Answer 1..........................................................................................................................................2
Answer a......................................................................................................................................2
Answer b......................................................................................................................................2
Answer c......................................................................................................................................2
Answer d......................................................................................................................................2
Answer e......................................................................................................................................3
Answer f.......................................................................................................................................3
Answer g......................................................................................................................................3
Answer h......................................................................................................................................3
Answer i.......................................................................................................................................4
Answer j.......................................................................................................................................4
Answer k......................................................................................................................................4
Answer l.......................................................................................................................................5
Answer 3..........................................................................................................................................6
Answer a......................................................................................................................................6
Answer b......................................................................................................................................7
Answer 4..........................................................................................................................................7
Answer a......................................................................................................................................7
Answer b......................................................................................................................................8
Answer c......................................................................................................................................8
Answer 5..........................................................................................................................................9
Answer a......................................................................................................................................9
Answer b......................................................................................................................................9
Answer c....................................................................................................................................10
Answer d....................................................................................................................................11
Answer 6........................................................................................................................................12
Answer a....................................................................................................................................12
Answer b....................................................................................................................................12
References......................................................................................................................................13

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Answer 1
Answer a
GDPIncome Method=Return¿ labor+ profit of firms+ other factors rental
¿ 2651+1687+ 482
¿ $ 4820 billion
Answer b
GDPExpentituremethod=Consumption+Investment +Government+ Export−Impor
¿ 3115+785+210+585+ 690−565
¿ $ 4820 billion
Answer c
Gross National Expenditure(GNE)=Consumption+Government +Investment
¿ 3115+210+585+785
¿ $ 4695 billion
Answer d
Net Domestic Product ( NDP )=GDP−consumption of ¿ capital
¿ 4820−320
¿ $ 4500 billion
Answer e

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Net Domestic Products (NDP) include the effect of depreciation while GDP does not
include depreciation. In an economy, if GDP increases because of increased depreciation that
higher GDP does not make people better off (Carlin & Soskice, 2014). Because of this, NDP is
often considered as a better measure of well-being compared to GDP.
Answer f
Gross National Product (GNP)=GDP−net factor income paid abroad
¿ 4820−34
¿ $ 4786 billion
Answer g
Net National Product ( NNP )=GNP−consumptionof ¿ capital
¿ 4786−320
¿ $ 4466 billion
Answer h
Current account balance=Export−import−factor payment abroad
¿ 690−585−34
¿ $ 91 billion

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Answer i
Gross national saving ( GNS )=GNI−C−G
¿ $ 4786−$ 3115−$ ( 585+210 )
¿ $ 4786−$ 3115−$ 795
¿ $ 876 billion
Answer j
National saving=Private saving+Public saving
¿ ( Y −T −C ) + ( T −G )
¿ ( $ 4820−$ 17−$ 3115 ) + ( $ 17−$ 795 )
¿ $ 1668−$ 778
¿ $ 890 billion
Answer k
Suppose, the consumption function is given as
C=a+ bY
¿ , 3115=a+0.63 × $ 4820
¿ , 3115=a+3036.6
¿ , a=3115−3036.6
¿ , a=78.4

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When GDP changes to $4873, then the new consumption becomes
C=78.5+ ( 0.63 × $ 4873 )
¿ $ 78.5+$ 3069.99
¿ $ 3148.39 billion $ 3148 billion
Answer l
New Export=690+4=$ 694 billion
New Private investment =785−3=$ 782 billion
Government Consumption=585−3=$ 582 billion
Government investment=210+4=$ 214 billion
Gross Domestic Product=C + I+G+ X−M
¿ 3115+782+582+214+ 694−565
¿ $ 4822 billion

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Answer 3
Answer a
Demand-pull inflation is one that is caused by excess demand. As people get more
money they can pay more for goods and services, which raises overall demand, resulting in an
increase in price.
Figure 1: Demand-pull inflation
Cost-push inflation on the other hand is one that is caused by supply side disruption
ocurrd due to an increase in cost of production.

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Figure 2: Cost-push inflation
Answer b
A sharp rise in consumption and investment with a positive business environment
increases aggregate demand causing demand-pull inflation. Another reason for demand-pull
inflation is currency depreciation. As currency depreciates price export falls, which boosts export
demand.
One primary reason of cost-push inflation is an increase in wages. As labor is one
primary input in production, an increase in wage increases production cost causing cost-push
inflation (Argy, 2013). Another factor leading to cost-push inflation is the increased price of
some of the key inputs such as oil, energy, steel and others.
Answer 4
Answer a

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Policymakers should not target to achieve rate of unemployment to be zero as zero
unemployment would be a terrific condition of citizen of country. The three types of
unemployment that an economy commonly experience are cyclical unemployment, frictional
unemployment and structural unemployment. Of these structural and frictional unemployment
form natural rate of unemployment that is desired for the economy. Zero unemployment
therefore is not a positive thing for the economy. Positive unemployment implies the price the
economy pay for structural and technological development contributing to economic prosperity.
Answer b
Long-term unemployment from view point of classical economists’ is a temporary and
voluntary. The economy in the long run achieves full employment equilibrium. Even though the
economy deviates from equilibrium, it is a short-term phenomenon and the economy retains it
full employment y following a self-adjustment mechanism (Gottheil, 2013).
Answer c
Structural unemployment in an economy is caused due to a structural shift in the
economy, technological improvement and lack of required skills of workers making it difficult
for the workers to find suitable jobs. Cyclical unemployment in contrasts caused due to business
cycle fluctuation.
Structural unemployment is a matter of great concern as if not addressed properly, and
then it can create long-term unemployment, which is harmful for an economy.

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Answer 5
Answer a
As firm managers have better skills of marketing and selling, they convinced customers
in a better way to buy different goods and services. This increases aggregate demand resulting in
an increase in real GDP and inflation.
Figure 3: Improvement in marketing and selling skills
Answer b
Increase in personal income tax lowers disposable income which in turn reduces
consumption spending resulting in a decrease in aggregate demand. As aggregate demand
decline, both GDP and price level contract.

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Figure 4: Increase in personal income tax
Answer c
As export increases, there is an increase in net export, which increases aggregate demand
of the economy. With increase in aggregate demand, GDP and price level increases.

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Figure 5: Increase in export
Answer d
If capital stock destructs due to war then there is disruption in aggregate supply. As
aggregate supply lowers equilibrium, GDP falls while price level increases.
Figure 6: Destruction of capital because of war

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Answer 6
Answer a
Advantages and disadvantages of using CPI
Two main advantages of CPI are its flexibility and consistency. Consistency reflects the
fact that CPI measures cost of a certain basket of goods and services that is consistent in
measuring average costs that consumers face (Stiglitz & Rosengard, 2015). CPI is flexible in the
sense that it can take into consideration seasonal adjustment and choice of consumers.
CPI often overstate the price level because of substitute bias. This is because not price of
all goods change by equal proportion, price of some goods may crease while price of others may
fall. CPI however fails to include this effect. CPI also does not measure the effect of quality
change.
Answer b
Winners and losers of inflation
Peoples’ whose income do not vary with price level suffers a loss from inflation. These
people include savers, retirees having fixed income, workers with fixed payment and borrower
with variable rates (Ascari & Sbordone, 2014). In contrast, borrowers with fixed repayment rate,
investors in stocks and investors in commodities gain because of an increase in effective income.

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References
Argy, V. (2013). International macroeconomics: theory and policy. Routledge.
Ascari, G., & Sbordone, A. M. (2014). The macroeconomics of trend inflation. Journal of
Economic Literature, 52(3), 679-739.
Carlin, W., & Soskice, D. W. (2014). Macroeconomics: Institutions, instability, and the
financial system. Oxford University Press, USA.
Gottheil, F. M. (2013). Principles of macroeconomics. Nelson Education.
Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the public sector: Fourth international
student edition. WW Norton & Company.