Question

. Explain in your own words the terms Demand-Side and Supply-Side Inflation. Provide examples for each. What does the Phillips curve illustrate?

What is the relationship between the Phillips curve, Aggregate Demand, and Aggregate Supply curves? Explain in your own words the term Hyperinflation. How can policymakers fight it? Provide examples.

Answer 1

Explain in your own words the terms Demand-Side and Supply-Side Inflation. Provide examples for each.

Inflation is high and sustained rise in general price level of country. Inflation can be either caused by demand side or supply or both.

Increase in demand relative to supply, would lead to rise in general price level. It is called demand side inflation. For example, rise in government spending increase purchasing power of people and they tend to demand more. If supply does not rise, now few goods would be chased by large number of money, so rise in price would be outcome.

Other side, rise in cost and fall in supply relative to demand give rise to the supply side inflation. Or fall in supply automatically, increases competition for goods, thus it results into rise in price.

What does the Phillips curve illustrate?

Phillips curve depicts negative relationship between inflation and unemployment rate. Rise in the inflation rate is accompanied by fall in unemployment rate.

What is the relationship between the Phillips curve, Aggregate Demand, and Aggregate Supply curves? Explain in your own words the term Hyperinflation. How can policymakers fight it? Provide examples.

Phillips curve shows the relationship between inflation and unemployment. This relation can explained with help of aggregate demand and supply. Rise in demand, leads to increase in supply but demand is not fully reflected on supply, it partly leads to rise in price level. Thus, demand increases supply and supply reduces unemployment rate.

Thus, all of these variables are intimately interconnected.

Extreme high and sustained rise in price level is called hyper inflation. Inflation rate runs in 100 % or above. Recently, Venezuela faced the problem of hyperinflation.

Government must reduces its expenditure and increase taxes to deal with hyperinflation. Further. central bank of country must follow the tight monetary policy.