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Trev Inflation, costpush, demand pull, inflation in islm

Inflationary gap AB as that is the distance aggregate demand exceeds production. It could also be Y*Y1 or Y1/Y* (bearing in mind Y1 is unatainable)

Important preposition is that the monetary policy is accomondating

Now because there is an inflation LM curve starts to shift if monetary policy is not accomondating. So without monpol inlationary gap cannot persist forever.

Restriction is that national income is given above. The LM curve is really the real money supply (not only the money demand, only when p is constant).

Interest rates rise in the process. Keynesian govn. regards increases in r undesirable. So they adopt accomondating monetarry policy:

Assume authorities are prepared to accept the r2, but no more. So they rise the Ms so Ms rises in proportion to prices. So LM remains in its original position. If they expand the LM curve the inflationary gap will be even larger. This kind of inflation is called a demand pull inflation. The sources of inflation can be traced to current or past state of economy wherer aggregate demand has exceeded aggregate supply.

Demand pull inflation was feared in 1950 - high employment and rapid economic growth.

Many Keynesians never expected that demand pull is the only source of inflation, but stong cost-push tendencies also exist. This tended to be wage-push. So inflation can exists even below full-employment level.

Class fight view - workers and owners were fighting for share in GDP. W*L/PY is the share of labour of Y. Rest is the share of capitalists. If workers are not satidfyed with their share they want h5gher wages, but capitalists will ujust put up prices. This goes further. NOthing to do with effective demand.

A more realistic version also exists. The idea of real wage resistance. If exchange rate is devalued (rise in small e, one $ buys more pounds now). The price of finnished goods rise and the price of raw materials rise. But then W must be compensated too. Assumption is that workers have a target real wage rate, which they will defend. Autonomous wage push (life on its own).

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