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Chapter 24: Q. 21 (page 655)

How can demand-pull inflation lead to cost-push inflation?

Short Answer

Expert verified

Demand-push inflation raises the prices of goods and services sold in the market and raises inflation rates.

Step by step solution

01

Step 1. Introduction

Inflation is defined as a steady increase in the prices of goods and services within an economy over time.

02

Step 2. Explanation

Demand-push inflation raises the prices of goods and services sold in the market and raises inflation rates, causing workers to demand higher pay in the hope of future increases in the prices of goods and services. Cost-pull inflation would result as a result of this.

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Most popular questions from this chapter

How can monetary authorities target any inflation rate they wish?

During the global financial crisis, how was the Fed able to help offset the sharp increase in financial frictions without the option of lowering interest rates further? Did the Fed鈥檚 plan work?

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and an estimate of the natural rate of unemployment (NROU). For the price index, adjust the units setting to "Percent Change From Year Ago." For the unemployment rate, adjust the frequency setting to "Quarterly." Select the data from 2000through the most current data available, download the data, and plot all three variables on the same graph. Using your graph, identify periods of demand-pull or costpush movements in the inflation rate. Briefly explain your reasoning.

鈥淚f autonomous spending falls, the central bank should lower its inflation target in order to stabilize inflation.鈥� Is this statement true, false, or uncertain? Explain your answer

Suppose three economies are hit with the same temporary negative supply shock. In country A, inflation initially rises and output falls; then inflation rises more and output increases. In country B, inflation initially rises and output falls; then both inflation and output fall. In country C, inflation initially rises and output falls; then inflation falls and output eventually increases. What type of stabilization approach did each country take?
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