Saturday 7 March 2009

Increases in prices not always cause inflation

The Phillips curve represents the relationship between the rate of inflation and the unemployment rate.
Inflation: a sustained rise in prices level.There are two types of inflation.
  • Cost push inflation which is occurred when increases in the price level caused by increases in the costs of production.
  • Demand pull infaltion which is occurred when increases in the price level caused by increases in aggrgate demand.

However, i want to emphasis one point that increases in price of goods and services may not cause Cost push inflation ( such as INCOME stay the same). It is because when there is an increases in certain products, when you purchases it, you will lose your ability to purchases another product since your income stay the same. Therefore, cost puch inflation will not occurre.

Cost push inflation occurres only when there is a continous rise in the general price levels due to increasing output costs. That`s a high cost of inputs lead to a fall in AS, AD remain consistent.

BUT, why i wrote about the phillips curve ?? i don`t know. T.T

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