Question

1. Explain the differences between cost push and demand pull inflation. What are the macroeconomic policy suggestions regarding the cost push and demand pull inflation?

2. Explain the following terms with examples:

a. The Phillips curve. b. Purchasing power parity

c. The expenditure multiplier.

d. Crowding out effect

e. Natural rate of unemployment

Answer 1

1. Cost push inflation is when price level goes up due to increase in input prices which shifts the AS to the left. Demand pull inflation is when there is increase in demand ie. the demand curve shifts to the right.

IN terms of demand push inflation, government can reduce price level by following contractionary fiscal policy. Or Fed can follow contractionary monetary poliyc. This would reduce the AD.

When there is cost push inflation, government should subisides the producers to reduce their costs of production.

Please post remaining questions separately.