TOPIC: INFLATION

 

Qn1. Define inflation:

Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.

b) Mention and explain the causes of inflation in South Sudan

the main causes of inflation in south sudan

the main causes of inflation of inflation can be grouped in to three broad categories

As their names suggest, demand-pull inflation is caused by development on the demand side of the economy while cost push inflation is caused by the effect of higher input costs on the supply side of the economy.

Inflation can also result from inflation expectation that is what households and business thinks will happen to prices in the future. These different causes of inflation are considered by reserve bank when it analyses and forecasts inflation.

Demand pull inflation

Demand pull inflation arises when the total demand for goods and services increases to exceed the supply of goods and services that can be sustainably produced. The excess demand put upward pressure on prices and across a broad range of goods and services and ultimately leads to an increase in inflation that it pulls inflation higher.

Cost push inflation

Cost push inflation occurs when the total supply of goods and services in the economy which can be product falls. A fall in aggregate supply is often caused by an increase in the cost of production. If aggregate supply falls but aggregate demand remains unchanged, there is upward pressure on prices and inflation. That is inflation Is pushed higher.

Inflation expectations.

These are the beliefs that house hold and firms have about future prices increase. They are important because expectation about future prices increase can affect current economic decisions that can influence actual inflation outcomes.

 

Increased money supply

The operation of private and central banks effectively creates the money we use. Central and private banks have the authority to manage and influence the money supply within an economy while private bank do this via the lending process.

Currency devaluation

When a currency’s value falls, it becomes cheaper in comparison to other currencies for example, if the us dollar weakens you can now buy more dollars with the same amounts of sterling man before.

Government policies and regulations

Governments live the UKS often aim a 29% inflation rate. Economists believe inflation at this level is good for balancing economic growth and keeping prices stable.

Investing during inflation.

To protect the value of your investments against inflation, you could consider creating a balanced portfolio that can withstand rising consumer price and unexpected macroeconomic event.

c) Explain the different types of inflation in south sudan

demand pull inflation

this is when the aggregate demand in an economy exceeds the aggregate supply. This increase in the aggregate demand might occur due to income or the level of public expenditure.

Cost push inflation.

Supply can also cause inflationary pressure. If the aggregate demand remains unchanged but the aggregate supply falls due to exogenous cause, then the price level increase.

Open inflation

This is the simplest form of inflation where the price level rises continuously and is visible to people. You can see the annual rate of increase in the price level

Repressed inflation

Let’s say that there is excess demand in an economy. Typically, this leads to an increase in price.

Hyper inflation

In hyper-inflation the price level increase at a rapid rate, in fact you can expect price to increase every hour usually this leads to the demonetization of an economy.

True inflation

This takes place after the full employment of all the factor inputs an economy’s when there is full employment, the national output becomes perfectly inelastic.

Semi-inflation

Even before full employment, an economic might face inflationary pressure due to bottle neck for certain sectors of the economy.

Qn2. Draw and explain APPF for an economy that produces milk and cookies.

Production possibly frontier.

As the name suggests the production possibility frontier shows the production of two goods one on each axis, its graphically show the possibilities of production on the curve, thus the amount of product done in that economy.  The production possibly frontier is essential as it shows the commodities to be produced and the amounts.

Explanation

The production possibly frontier for milk and cookies before the diseases can be seen as curve cm in the diagram below. The production of milk is taken on the x-axis while that of cookies is taken on my y axis.

 

What happens to this frontier if a disease kills halt of the economy’s cows?

If disease kills half of the cows in the economy’s, the production of milk is likely to decline and the new production possibly frontier will be cm.

The production possibility frontier depicts the two commodities produced in the economy with all the available resources and inputs. These inputs are directly impacted if the resource get reduced exhausted or are removed from the production processes.