Question

a) Illustrate demand-pull and cost-push inflation using the AD-AS model for the short-run period. b) Assuming...

a) Illustrate demand-pull and cost-push inflation using the AD-AS model for the short-run period.

b) Assuming real GDP is initially below the full-employment level, which type of inflation is worse in your opinion [justify your opinion].

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Answer #1

a) Demand Pull inflation

It is caused by an increase in aggregate demand, with the increase in disposable income

Cost-Push infaltion

It is caused by an increase in costs, which reduces the supply thereby making people to spend more which reduces real income

b) When the real GDP is below the full employment level which leads to recessionary GAP. At this situation the cost push inflation is worse as it reduces the purchasing power, decreased output and high inflation which reduce the value of wealth and currency.

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