Question

Explain the difference between cyclical and structural inflation.

Describe some of the factors that may lead to either types of inflation. In the process, make sure to discuss the possibility of an inflation-unemployment tradeoff.

And now for consequences: Mention some of the possible impacts of inflation. To what extent should inflation be fought or tolerated?

Answer 1

As we reach the top of the business cycle we see more rapid inflation . This is referred to as cyclical inflation . Cyclical infaltion largely arises from the demand side of the economy . It is as recurrent as a business cycle . In this case unemployment also declines progressively since they are inversely related .

Structural inflation takes place when the price level increases uniformly through the whole of business cycle . Structural inflation occurs due to inherent problems in the economy's way of functioning- such as, lack of markets for producers to sell, eg : high food prices in India are partly due to structural reasons. Another example is the lack of investable capital which makes the economy unable to meet demand etc . This does not affect unemployment much since this does not relate to the demand side of the economy .

Inflation causes erosion of real value of any economic variable . Real wages , real GDP all declines . inflaton has certain costs like menu costs and shoe leather costs etc . It has some benefits also because a little inflation trigers higher production growth . Inflation at a very low level should be allowed or tolerated , but beyond it inflation should not be allowed to grow .