Cost Push Inflation – Types of Inflation | Macroeconomics

Cost Push Inflation

Cost Push Inflation

Cost Push Inflation is a type of inflation that occurs when aggregate demand remains constant but there is a decline in aggregate supply due to external factors that cause rise in price levels. An increase in labor and materials costs throughout the supply chain causes cost-push inflation. When this happens, the price of goods and services will increase, resulting in a decrease in supply. In contrast, demand-pull inflation occurs when prices rise simply because of a rise in demand.

Read more

Demand Pull Inflation – Types of Inflation | Macroeconomics

Demand Pull Inflation

Demand Pull Inflation

Demand-pull inflation occurs when the aggregate demand for goods and services exceeds the aggregate supply of goods and services at existing prices, that is, when goods and services are in excess demand. This type of inflation increases jobs and stimulates the economy, but it also increases the price of goods. Due to a lack of needed supply, businesses raise prices in order to meet the increased demand. Historically, this is the most common reason for inflation. The demand-pull theory explains inflation in economics by describing the effects of imbalanced aggregate supply and demand. Basically, when the demand for a product exceeds the supply, the price rises. Many economists refer to this phenomenon as “too many dollars chasing too few goods.”

Read more

Seasonal Unemployment – Concept, Benefits, Limitations and Examples | Macroeconomics

Seasonal Unemployment

Seasonal Unemployment

A seasonal unemployment situation is when a temporary, regularly occurring phenomenon affects the number of available employment opportunities. Simply put, a seasonal unemployment situation occurs whenever the rate of unemployment rises during a particular season.

There are many reasons for seasonal unemployment, which affects many industries. Generally, the term seasonal refers to the occurrence of an expected and recurring situation, such as the occurrence of a particular weather station or a moment during the year when demand decreases. In order to maintain a low unemployment rate, this seasonal shift in employment figures must be addressed by the government.

Seasonal unemployment works by ensuring that the number of jobs available matches the number of employees an organization needs at various times of the year. During certain seasons, a company might need more employees than it does in other seasons, resulting in seasonal unemployment after the more lucrative season ends. In a season of seasonal unemployment, employees who work in positions that are directly related to a certain time of year or event are laid off and must find new work. Some people respond to seasonal unemployment by transitioning to a new seasonal job each time a season changes so they can continue working seasonal jobs and find employment again quickly.

Read more

Cyclical Unemployment – Concept, Methods, Causes and Examples | Macroeconomics

Cyclical Unemployment

Cyclical Unemployment

Cyclical unemployment occurs when labor forces are reduced due to business cycles or fluctuations in the economy, such as recessions (periods of economic decline). The rate of cyclical unemployment is low when the economy is at its peak or experiencing continuous growth. During this period, sales and income increase, so more people are needed to meet the demand.

The main reason for high unemployment rates is cyclical unemployment. This is caused by a downturn in the business cycle. It occurs as part of the natural rise and fall of economic growth over time. Unemployment caused by cyclical economic contractions is temporary and determined by the length of the recession. Recessions usually last around 18 months. The unemployed tend to be rehired when the business cycle enters an expansionary phase (rising toward the peak of the wave).

In contrast, during a recession, cyclical or involuntary unemployment increases due to a decline in demand for goods and services. This means that production decreases, resulting in fewer workers needed, leading to layoffs. In the labor market, there are more unemployed workers than job openings.

Read more

Circular Flow Diagram – Models of Economics | Introductory Macroeconomics

Circular Flow Diagram

Circular Flow Diagram

Buying goods is a necessity for everyone. Some of those goods are groceries, while others are clothing for an important event. A functioning economy depends on the purchase of goods, no matter what they are. Every time we buy a good, we contribute to the economy. We’ll examine how those purchases were just one piece of a bigger economic puzzle in this article. An economy works in circles, which is referred to as the circular flow diagram in economics. The circular flow diagram is a basic model used in economics to explain the operation of an economy. It examines primarily the flow of money, goods, and services throughout the economy. There are two main characters in the diagram: firms and households, where households represent consumers and firms represent producers.

  • This diagram shows how households and firms interact in two markets: the goods and services market where firms sell to households and households buy from business firms, and the labor market where household workers sell to firms.
  • This circular flow diagram shows how households and firms interact on the goods and services market, as well as the labor market. The arrows indicate that households receive goods and services and pay firms for them in the goods and services market.
  • As part of the labor market, households provide labor and are paid by firms through wages, salaries, and benefits.
  • Goods and services are produced and sold by companies to households in the market for goods and services (or product market).

Circular Flow Diagram

Read more

Factors Affecting Money Supply- 10 Major Factors Affecting Money Supply | Macroeconomics

Factors Affecting Money Supply

Factors Affecting Money Supply 

A country’s money supply can be described as the total amount of money available at a particular time in its economy. Among the types of money are cash, coins, check deposits, and savings accounts. People can borrow money at different interest rates depending on the money supply, which influences economic activity, inflation, and interest rates.

Most countries’ central banks, such as the Federal Reserve in the United States, measure the money supply. In order to increase or decrease the money supply, the central bank can buy or sell government securities.

Read more

Quantitative Instruments of Monetary Policy – 4 Key Instruments | Macroeconomics

Quantitative Instruments of Monetary Policy

Quantitative Instruments of Monetary Policy

What do you mean by monetary policy?

Monetary policy is the process by which the monetary authority of a country, like the central bank or currency board, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

The central bank uses several instruments of monetary policy, referred to as monetary variables at its discretion, to regulate the credit availability and liquidity (money supply) in a manner that controls inflation and at the same time stimulates the growth of the economy. The instruments of monetary policy are also called as “weapons of monetary policy”.

Central banks use monetary policy to determine how much money they will create in order to achieve price stability (or low inflation), full employment, and economic growth. A change in demand for money relative to supply requires a spending adjustment as money is a medium of exchange. In order to achieve the goals it does not control, some of the variables that the Central Bank controls are adjusted, such as the monetary aggregate, interest rate, or exchange rate. Depending on the economy, especially its financial sector, the Central Bank uses different monetary policy instruments.

Quantitative Instruments are also known as General Tools of Monetary Policy. This type of instrument relates to the Quantity or Volume of money. They are also known as General Tools for credit control or Quantitative Tools of credit control. Their purpose is to regulate or control the overall level of bank credit in the economy. The indirect nature of these tools makes them useful for influencing the quantity of credit in the country. Increasing the Statutory Liquidity Rate (SLR) will decrease liquidity, and reducing it will increase it.

The following are the important Quantitative instruments of monetary policy.

Read more

Difference between MEC and MEI – MEC Vs MEI | Investment Functions

Difference between MEC and MEI

Difference between MEC and MEI

Marginal Efficiency of Capital (MEC)

Marginal Efficiency of Capital (MEC)  is the rate of discount which makes the discounted present value of expected income stream equal to the cost of capital. MEC was first introduced by J.M Keynes in 1936. According to him, it is an important determinant of autonomous investment.The marginal efficiency of capital is a key concept in economics that describes the relationship between the production of goods and services and the investment in capital.

  • The marginal efficiency of capital is used to measure the amount of output produced by an extra unit of investment. The marginal efficiency of capital is important because it helps to understand how an economy grows and how resources are allocated.
  • The marginal efficiency of capital (MEC) is the increase in output that results from an additional unit of investment.
  •  MEC is determined by the productive capacity of the capital goods available for use and the expected return on investment.
  • The MEC declines as the amount of capital invested increases, because each successive unit of investment has a lower expected return.
  • The MEC plays an important role in economic decision-making, because it represents the maximum return that can be expected from an additional unit of investment.
  • In order to maximize economic growth, firms must invest in projects with a MEC that is greater than the cost of capital.
  • The MEC can also be used to compare different investment opportunities and determine which one will generate the highest return.

Read more

Introductory Macroeconomics – Old Question Paper 2014| Semester: Spring(New)

Introductory Macroeconomics BBA | BBA-BI | BBA-TT | BCIS | BHCM Old Question Paper Year: 2014 | Semester: Spring (New) Pokhara University   Exam 2014 Spring (New) Section A Very Short Answer Questions Attempt ALL the questions. [10×2] 1. Point out the basic issues of macroeconomics. 2. What would a traditional Phillips curve show? 3. … Read more