According to Keynesian, inflation may be driven by increased demand and / or cost growth
Demand-driven inflation is a situation where aggregate demand persistently exceeds the aggregate supply when the economy is within or near full employment. Aggregate demand may arise for several reasons. Reducing personal income tax would increase disposable income and contribute to rising consumer spending. Reducing the rate of interest may stimulate investment growth and lead to higher consumption expenditure for consumer spending. Increasing foreigners' revenue may lead to an increase in exports to the country. The expansion of public expenditure financed by the banking system under full employment conditions is one of the reasons for inflation.
Growth in demand originally can be achieved if unemployed resources are available. Increasing supply and increasing demand at this point has little or no effect on the overall price level. If the total demand for goods and services continues to grow, a full employment situation will eventually develop and an increase in output is not possible. This leads to inflationary pressures in the economy
Demand-driven inflation is driven by excessive demand, high exports, strong investment, rising money supply, or public funding from financing. If companies work well, the company will increase demand for production factors. If the Factor market is already full employment, input prices will rise. Businesses may have to offer wages to get workers out of their existing jobs.
It is likely that, under full employment conditions, wage increases exceed productivity growth, resulting in higher costs. Companies will offer higher prices to consumers. Workers will demand higher wages, which will fuel fuel to aggregate demand, which will increase again. The process continues as the prices of the product market and the factor market are upward.
According to Keynes theory, which is the basis for cost-inflation inflation, inflation is the factor of the page. This means that Keynesian believes that rising production costs will lead to inflation.
Cost-inflation inflation is generally considered to be primarily a wage inflation process, as wages usually form an integral part of the total cost. The huge and militant unions who are negotiating wage growth over productivity are more likely to enjoy their successful pay demands, the closer the economy is to full employment and the greater the lack of qualifications.
Carbon, oil and many other raw materials, or even semi-products, which are used as part of the manufacturing process, appear as higher consumer prices. The oil crisis of 1973-1974 and the 1970s and 1980s has led to severe cost-inflation inflation in many countries
Inflation can be generated when the depreciation of the domestic currency is experienced. The depreciation of the country's currency will result in an increase in the prices of imported foodstuffs, raw materials and capital goods, resulting in an increase in production costs
Indirect taxes (taxes on goods and services) raise domestic prices regardless of demand demand and cause causal factors wage pressures for the economy.
When companies face higher wage costs, they increase their product prices to maintain profits. Sometimes they also seize the opportunity to increase their profit margins. The higher the price is the inflexibility of demand for goods, the less likely it is that such behavior leads to a decline in demand for goods.
Cost reduction is inevitable if there is a struggle between employees and companies. Both seek to maintain their real income by offering wages and profits. Workers force companies to provide inflationary wages while companies increase their prices to increase their profit margins. The rise in prices is inevitable. This process is known as a wage price spiral
In practice, it may not be easy to determine the primary causes of inflation. Demand pulling and cost reduction can be combined. Initial demand rebalancing may increase the power of trade unions, which will then use this power to increase costs. Alternatively, the initial cost of inflation may also encourage the government to increase all demand to offset the growth of unemployment. When inflation is in progress, it is not always easy to recognize the cause.
Keynes's demand and cost-cutting theories have pointed out that the closer the economy is to the full employment, the greater the inflationary pressure. The higher the unemployment rate, the lower the inflation pressure
Source by sbobet