TYPES OF INFLATION
Demand pull; occurs when the aggregate demand in an economy exceeds aggregate
supply ,which pushes prices up. This typically occurs by an increase in consumer
spending ,government expenditure or investment.[Mankiw,2021]
Cost push inflation; occurs when the cost of production increases, causing firms to raise their
prices to maintain profit margins .This could be from increased wages or raw material
costs[Krugman and Wells,2020]
Hyperinflation; occurs due to a collapse in a countrys monetary system[Mishkin,2022]
Built-in inflation ;occurs when workers demand higher wages due to rising costs of living and
then businesses increase prices to cover high labour costs[Krugman and Wells,2020
CAUSES OF INFLATION
]Demand pull inflation; An increase in consumer demand for goods and services that exceeds
the economy capacity to supply them leads to inflation [Mankiw,2021]
Cost push inflation; Increased production costs, such as raw materials prices or wages can lead
to higher prices as businesses pass on the cost to consumers[ Blanchard and Johnson,2013]
Monetary policy; when central banks increase money supply, there is more money in circulation
, which can increase demand and cause inflation[Mishkin,2022]
Expectations of future inflation; If people expect prices to rise they might act in ways that drive
iinflation such as demanding higher wages or buying more goods in anticipation to high
prices[Krugman and Wells ,2020]
EFFECTS OF INFLATION
Decreased purchasing power; It erodes the purchasing power of money making goods and
services more expensive .People could not afford the same amount of goods they afforded
previously[Mankiw,2021]
Distorted price signals; It can lead to distort the price signals in the market..As prices increase
unpredictably it becomes harder for consumers and businesses to make rational decisions about
spending and investment[Blanchard and Johnson,2013]
Income redistribution; it affects people differently ,especially those on fixed incomes who may
suffer as the real value of their incomes declines[Krugman and Wells,2020]
Higher interest rates; To combat inflation ,Central banks may increase interest rates ,which can
raise borrowing costs for businesses and consumers potentially slowing economic
growth[Mishkin,2022]
SOLUTIONS TO INFLATION
Monetary policy; Central banks can raise interest rates or reduce the money in supply to control
inflation. Higher interest rates discourage borrowing and reduce consumer
spending[Mishkin,2022]
Fiscal policy; Governments can reduce public spending or increase taxes to reduce the amount
of money circulating in the economy [Blanchard and Johnson]
Supply side reforms; Increasing productivity and supply of goods and services can help mitigate
cost push inflation[Krugman and Wells,2020]
Wage controls; Governments can implement measures such as price or wage controls to limit
inflationary pressure,although this can have mixed results[Mankiw ,2021]
TYPES OF UNEMPLOYMENT
Sessional unemployment; Arises when demand for labour fluctuates with the season ,such as
agriculture[Mishkin,2022]
Cyclical unemployment; Results from the economic cycle . During periods of recession ,demand
for goods and services decreases ,leading to layoffs and unemployment [Blanchard and Johnson
2013]
Structural unemployment; Happens when there is a mismatch between the skills of the labour
force and jobs available .This can occur due to technological changes[Mankiw,2021]
Frictional unemployment; Occurs when workers are temporally between jobs or are entering
the workforce for the first time[Krugman and Wells,2020]
CAUSES OF UNEMPLOYMENT
Economic recession; A downturn in the economy can lead to lower demand for goods and
services causing firms to lay off workers[Blanchard and Johnson,2013]
Technological advancements; Automation and new technologies can make certain jobs
obsolete, causing structural unemployment[Mankiw ,2021]
Globalization; Companies may outsource jobs to countries where labour is cheaper , causing
job losses in higher wage countries [Krugman and Wells,2020]
Government policies; Excessive taxes ,labor market regulations on hiring and firing may
discourage businesses from hiring workers[Mishkin,2022]
EFFECTS OF UNEMPLOYMENT
Reduced economic output; it leads to lower production levels in the economy which results in a
decrease in gross domestic product[Blanchard and Johnson]
Increased government spending; As unemployment rises , government expenditure on welfare
programs such as unemployment benefits increases potentially leading to higher public
debt[Mishkin,2022]
Social costs; Longterm unemployment leads social unrest ,increase in poverty and
inequality[Krugman and Wells,2020]
Skill erosion; Prolonged unemployment leads to loss of skills and work experience,which makes
it more difficult for unemployed individuals to find new jobs[Mankiw ,2021]
SOLUTIONS TO UNEMPLOYMENT
Encouraging entrepreneurship; Providing incentives for small businesses development can
create new jobs and reduce unemployment[Krugman and Wells,2020]
Labour market flexibility; Reducing restrictions on hiring and firing can help businesses adapt to
economic conditions thereby lowering unemployment[Mishkin,2022]
Education and training; Workers can be provide with necessary skills for new or evolving
industries[ Blanchard and Johnson]
Fiscal stimulus; Governments can increase public spending to create jobs directly or indirectly
especially in infrastructure projects[Krugman and Wells,2020]
Monetary policy; Lowering interest rates can encourage investment and spending ,stimulating
job creation][Mankiw,2021]
References
Blanchard,O., and Johnson, D. R. [2013] . Macroeconomics [6th ed.]. Pearson Education
Krugman, P., and Wells, R.[2020] Macroeconomics [5th ed.].Worth Publishers.
Mankiw,N.G.[2021].Principles of economics [9th ed.].Cengage Learning
Mishkin, F. S. [2022]. The economics of money banking and financial markets[12 th ed.]. Pearson
