Page 201 - DECO402_Macro Economics

Macroeconomic Theory

Notes the sub-prices determined, which became the main cause of Profit pushed inflation. Profit
pushed inflation may also happen as a result of wage driven inflation. It is comparatively easy
to bring down profit pushed inflation, but once never ending Wage- Price-spiral surfaces, it
is difficult to remove wage rate inflation.
(iii) Higher Taxes: Government, by presenting taxes full of variations and by increasing the rate
of present taxes, especially the excise duty or indirect taxes like sales tax, may increase the
cost. Producers, by increasing the price of goods, pass the burden of tax on the consumers.
(iv) Availability and prices of Basic Inputs: When there is lack of favourable and basic raw
material and other inputs, their prices increase suddenly. Many important inputs are
controlled by the government and other authorities. Their prices are managed by supplying
agencies. For example, price of crude oil is determined by OPEC. Since for many industries,
oils take the form of a basic input, upwards revision of its prices by OPEC affects all these
industries. Hence increase in prices of a basic input is sufficient to increase the general level
of prices and may be a source of cost push inflation in the economy.
(v) Other factors: Fall in agricultural production due to natural calamities like insufficient,
excessive, irregular rain or flood, drought, famine etc may reduce collective supply; and
increases the price of agricultural goods. Similarly because of strikes, lockouts, disruption of
power supply etc industrial production may fall. Government’s domestic or foreign policy
may shift above the supply curve, because of which urdhavgaami (upward) behaviour starts
in the prices.
Demand pull and cost push inflation are interrelated and remain together in the economy. Increase
in cost of resources creates cost push inflation. Cost push inflation may also be successful when
demand stops increasing. But, it may not be maintained until excess demand is not there. At the other
side, demand pull inflation happens as a result of increase in demand for final goods, which creates
a rise in their prices. These price rises may increase the demand for resources of production, which
may again increase the prices of resources. Demand pull inflation and cost push inflation may exist
together. Of the two, cost push inflation is worst because it cannot be controlled by monetary and
treasury measures too.

Self Assessment
Multiple Choice Questions:
3. According to economists, slow increase in price levels is a ...............for economic progress.
(a) necessary condition (b) unnecessary condition
(c) favourable condition (d) adverse Condition
4. When monetary authorities lose control on running inflation, it is ...........of hyper inflation.
(a) bad result (b) result
(c) stage (d) last stage
5. Worst form of hyper inflation was seen during ..................
(a) periods of civil wars (b) during Slump
(c) during progress (d) none of these.
6. Due to suppressed inflation there may be ............................. from one kind of product to
another kind of product.
(a) deviation (b) deviation of demand
(c) control (d) demand control.

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