With the wage rate remaining constant, this increase in price level would result in a decrease in employees’ real wage rate, W/P1 0, where P1 > P0. When workers discover their actual salary has declined as a result of rising prices due to increased aggregate demand, they will demand higher wages in discussions with their employers, which will almost certainly be granted.
Furthermore, as previously stated, equilibrium to the right of potential GDP level Y suggests that unemployment has gone below the natural rate of unemployment, implying that there will be a labor shortage, implying that wage rates will rise. When firms raise salaries, the short-run aggregate supply curve shifts upward, and this process continues until the short-run aggregate supply curve reaches SAS1, which cuts the new aggregate demand curve AD1 at point E2, which is on the long-run supply curve LAS, causing the price level to rise to P2.
Equilibrium between aggregate demand and aggregate supply with price as P2, and the wage rate has risen by E0E2 equivalent to the rise in price level by P0P2 at point E2 on the long-run average supply curve LAC. As a result, real wages have been restored to their previous levels prior to the increase in aggregate demand from AD0 to AD1.
It’s worth noting that the equilibrium and pay rate at point E1 on the short-run average supply curve will migrate to point E2 on the long-run average supply curve through a series of wage adjustments and upward shifting of the short-run aggregate supply curve, rather than in a single leap. That’s why we used several arrows to illustrate the travel from point E1 to position E2 on the LAS.
Not only has the short-run average supply curve shifted upward to restore the former level of real wage rate, but real GDP has also returned to potential or full-employment GDP level Y.
What are the key reasons for India’s inflation?
When the government cannot earn enough revenue to cover its expenses, it must rely on deficit financing. Massive amounts of deficit finance were used during the sixth and seventh plans. In the sixth Plan, it was Rs. 15,684 crores, while in the seventh Plan, it was Rs. 36,000 crores.
Increase in government expenditure:
India’s government spending has been rapidly increasing in recent years. What’s more alarming is that the proportion of non-development spending has risen fast, now accounting for nearly 40% of overall government spending. Non-development spending does not produce tangible commodities; instead, it increases purchasing power, resulting in inflation.
Not only do the elements described above on the Demand side produce inflation, but they also add gasoline to the fire of inflation on the Supply side.
Inadequate agricultural and industrial growth:
Our country’s agricultural and industrial expansion has fallen well short of our expectations. Food grain output has increased at a rate of 3.2 percent per year during the last four decades.
Droughts, on the other hand, have caused crop failure in some years. During years of food grain scarcity, not only did the prices of food articles rise, but so did the overall price level.
What factors contribute to inflation?
Inflation is a significant factor in the economy that affects everyone’s finances. Here’s an in-depth look at the five primary reasons of this economic phenomenon so you can comprehend it better.
Growing Economy
Unemployment falls and salaries normally rise in a developing or expanding economy. As a result, more people have more money in their pockets, which they are ready to spend on both luxuries and necessities. This increased demand allows suppliers to raise prices, which leads to more jobs, which leads to more money in circulation, and so on.
In this setting, inflation is viewed as beneficial. The Federal Reserve does, in fact, favor inflation since it is a sign of a healthy economy. The Fed, on the other hand, wants only a small amount of inflation, aiming for a core inflation rate of 2% annually. Many economists concur, estimating yearly inflation to be between 2% and 3%, as measured by the consumer price index. They consider this a good increase as long as it does not significantly surpass the economy’s growth as measured by GDP (GDP).
Demand-pull inflation is defined as a rise in consumer expenditure and demand as a result of an expanding economy.
Expansion of the Money Supply
Demand-pull inflation can also be fueled by a larger money supply. This occurs when the Fed issues money at a faster rate than the economy’s growth rate. Demand rises as more money circulates, and prices rise in response.
Another way to look at it is as follows: Consider a web-based auction. The bigger the number of bids (or the amount of money invested in an object), the higher the price. Remember that money is worth whatever we consider important enough to swap it for.
Government Regulation
The government has the power to enact new regulations or tariffs that make it more expensive for businesses to manufacture or import goods. They pass on the additional costs to customers in the form of higher prices. Cost-push inflation arises as a result of this.
Managing the National Debt
When the national debt becomes unmanageable, the government has two options. One option is to increase taxes in order to make debt payments. If corporation taxes are raised, companies will most likely pass the cost on to consumers in the form of increased pricing. This is a different type of cost-push inflation situation.
The government’s second alternative is to print more money, of course. As previously stated, this can lead to demand-pull inflation. As a result, if the government applies both techniques to address the national debt, demand-pull and cost-push inflation may be affected.
Exchange Rate Changes
When the US dollar’s value falls in relation to other currencies, it loses purchasing power. In other words, imported goods which account for the vast bulk of consumer goods purchased in the United States become more expensive to purchase. Their price rises. The resulting inflation is known as cost-push inflation.
What are the three primary reasons for inflation?
Demand-pull inflation, cost-push inflation, and built-in inflation are the three basic sources of inflation. Demand-pull inflation occurs when there are insufficient items or services to meet demand, leading prices to rise.
On the other side, cost-push inflation happens when the cost of producing goods and services rises, causing businesses to raise their prices.
Finally, workers want greater pay to keep up with increased living costs, which leads to built-in inflation, often known as a “wage-price spiral.” As a result, businesses raise their prices to cover rising wage expenses, resulting in a self-reinforcing cycle of wage and price increases.
What are the primary reasons behind India’s inflation, Mcq?
Inflation is defined as a long-term increase in the prices of goods and services in a given economy. With an increase in general price levels, each unit of currency can purchase fewer things, reducing consumer purchasing power.
To assist students better grasp inflation, we’ve put together a series of multiple-choice questions and answers.
- This phenomena is known as _________, and it occurs when the price levels of products and services continue to plummet.
- The effect of too much money chasing too little products is said to be .
- Inflation occurs when the price of factors of production rises, and the result is .
- This situation occurs when the central government lowers the value of the domestic currency in terms of foreign currency.
- What does it imply to mention “sterilization of foreign inflow” in the context of inflation control?
- Withdrawing an equivalent local currency in order to keep the target exchange rate
- To control inflation in India, the Reserve Bank of India (RBI) can use the measure.
- Which of the following initiatives implemented by the Indian government effectively reduced the economy’s double-digit inflation rate in the 1970s?
- At the same time, revenue is distributed between two different groups of income recipients.
- Income distribution between two separate groups of income recipients at different times
- Because of _________, the share of food items in India’s total consumption expenditure has decreased during the last two decades.
What is creating 2021 inflation?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.
What are the different types of inflation and what produces them?
Demand-pull Inflation happens when the demand for goods or services outnumbers the capacity to supply them. Price appreciation is caused by a mismatch between supply and demand (a shortage).
Cost-push Inflation happens when the cost of goods and services rises. The price of the product rises as the price of the inputs (labour, raw materials, etc.) rises.
Built-in Inflation is the result of the expectation of future inflation. Price increases lead to greater earnings in order to cover the increasing cost of living. As a result, high wages raise the cost of production, which has an impact on product pricing. As a result, the circle continues.
In emerging countries, what are the main sources of inflation?
Government spending, money supply growth, world oil prices, and the nominal effective exchange rate are all seen to be sources of inflation in emerging countries. Table 3 shows that when there is a high level of government spending and high oil prices, inflation accelerates.
What are the four different kinds of inflation?
When the cost of goods and services rises, this is referred to as inflation. Inflation is divided into four categories based on its speed. “Creeping,” “walking,” “galloping,” and “hyperinflation” are some of the terms used. Asset inflation and wage inflation are two different types of inflation. Demand-pull (also known as “price inflation”) and cost-push inflation are two additional types of inflation, according to some analysts, yet they are also sources of inflation. The increase of the money supply is also a factor.
What is India’s inflation rate?
According to data provided by the National Statistical Office (NSO) on Friday, India’s retail inflation rate, as measured by the Consumer Price Index (CPI), was 6.07 percent in February 2022. According to a Reuters poll of 36 economists, the reading was expected to fall to 5.93 percent on an annual basis in February.