H Distinguish between cost-push and demand-pull inflation

Question 1

The two types of inflation (cost-push, demand-pull)

Answer 1

Cost-push: Decrease in AS

Demand-pull:Increase in AD

Question 2

Cost-push inflation(wage pressure;wage push, energy pressure)

Answer 2

Cost of an input drives Plevel (because cost-push is AS, and AS is ADAS and ADAS is Plevel and Y) up and full employment down.

Policy to +AD drives full emp. back to natural emp, but at higher prices.

*NARU - Non-accelerating inflation rate of unemployment; natural rate of unemployment

Question 3

How analysts can track wage pressure

Answer 3

Public data on hourly and weekly earnings and labor productivity to ID signs of potential wage pressure. Wage +’s are not inflationary as long as they remain in line w/ gains in productivity. To measure that relativity, check out unit labor costs ratio: The ratio of total labor compensation per hour to output units per hour.

Question 4

Additional source of wage pressure;expected inflation

Answer 4

If higher inflation is expected, workers will expect higher wage demands.

Figure expected inf. inflation-indexed bonds (TIPS) - otherwise similar non indexed Treasury bonds.

Question 5

Demand-Pull Inflation (+MS, +AD)

Answer 5

Where +AD but no same +AS = unsustainable

unemployment falls below natural rate, upward pressure on real wages
rising real wages result in a decrease in SRAS
Output falls back to natY but Plevel inc. to P2

Analysts: Use the capacity of utiliation rate of industry to indicate the potential for demand-pull inflation. High rates suggest production at or above potential GDP = potential inflationary pressure

Question 6

KEy diff. between Cost push and Demand pull (Impact on output)

Answer 6

Demand-pull increases GDP above full emp

Cost push decreases AS and initially GDP