Inflation Essay
Inflation refers to a sustained, general increase in the price of goods and services. Inflation at a very fast rate is hyper inflation, medium is called strato-inflation and low level, creeping inflation. Demand pull inflation is where aggregate demand exceeds aggregate supply. Firms cannot increase supply without increasing prices since the economy is at full employment. Cost push inflation occurs when the costs of the factors of production increase without a equal or greater increase in output. This causes firms to increase the price of their goods and services.
The Human Resources Minister of Malaysia claims that an increase in salaries may boost inflation, costs of production and decrease their competitiveness. He maintains that a decrease in salaries would solve the problem of escalating inflationary pressure. This is a two pronged statement since decreasing wages may deflate the economy however in the long run it may lead to even worse consequences.
If wage rates are decreased this will allow for a decrease in demand pull and cost push inflation. In relation to demand pull inflation (D.P.I) workers salaries may be reduced. Demand pull inflation is caused by an increase in government injections (spending) into the economy or consumer spending (boosted confidence). This would cause aggregate demand (total expenditure) in the economy to fall. This is characterised by decreased consumption since households now have less purchasing power as the nominal value of their money falls. The fall in disposable income will nullify the escalating demand for goods and services since purchasing power has been diminished. Read more…