Inflation and Unemployment Notes

Inflation is defined as a period of generally rising prices, measuring the average price change of goods/services over time.
It's a macroeconomic variable reflecting overall price level movement, not uniform price changes.
Inflation rate is the percentage change in price level; positive rate means rising prices, negative means falling prices.

Attributes inflation to built-in economic factors and varying sectoral changes.
Inflation results from reactions in one sector to events in another.
Expanding industries may increase wages with productivity, keeping prices stable in those sectors.
Trigger-off effect: low-productivity sectors bargain for wage increases, raising average wages above productivity gains, leading to inflation.

Creeping Inflation: Gradual price increase during economic expansion; some level is considered necessary for growth.
Galloping Inflation (Hyperinflation): Rapid inflation, often post-war, making money worthless quickly due to excessive money printing.
Suppressed Inflation: Inflationary pressures exist, but prices are controlled by governmental laws.
Spiral Inflation: Measures to correct inflation lead to further price increases.

Inflation isn't solely about money supply; it is also about output; money supply increase with equal output increase doesn't cause inflation.
Demand Pull Inflation: Demand exceeds supply at existing prices, creating shortages and diminishing returns.
- Inflation occurs when price increases outpace output increases.
- At full employment, supply becomes inflexible, and increased demand only raises price levels.
Cost Push Inflation: Rising production costs (wages, raw materials) decrease supply.
- Wage increases without productivity improvements lead to rising prices.
- Higher raw material costs severely affect supply.

Reduces the real value of money, hurting fixed income groups (pensioners).
Can lead to a breakdown of the money economy and reversion to barter or a new currency.
Redistributes wealth among asset owners; assets with fixed prices lose value.
Debtors benefit by repaying with cheaper currency, while creditors are hurt.
If domestic prices rise faster than trading partners, exports fall, imports rise, and trade terms worsen.
International inflation can cause global financial problems.
Inflation can lead to higher tax brackets, increasing government revenue.
Rising profits during inflation can encourage increased production and employment.

Price Control: Setting prices administratively, requiring policing, and is difficult with supply shortages; targets demand-pull inflation.
Fiscal Policy:
- Reduce government expenditure and run surplus budgets to decrease aggregate demand.
- Increase taxes on money income to reduce spending.