Cost push
inflation
Negative
supply
shock
Stability of
Inflation
Primary determinants of SRAS:
1. Productivity - If increase will cause inflation
2. Costs of production - if decrease will cause inflation (specifically see NEGATIVE SUPPLY
SHOCKS)
Leads to inflation AND unemployment.
Short-run: macroeconomic policies are rather INEFFECTIVE.
• Supply-side policies to lower costs to firms
An unexpected decrease in SRAS (will cause inflation + decrease in output)
1. Increase in oil prices (b/c oil is involved in production + transportation of everything)
2. Increase in wage rate (i.e. labour unions, minimum wage)
3. Depreciation of currency (depreciated currency makes importing raw materials expensive)
4. Natural disaster
5. Corporate taxes
Less than 2% will cause disinflation + deflation.
More than 3% threatens:
1. Loss of purchasing power
2. Lower real interest rates for savers