Description
It gives the Keynesian analysis of the business cycle. It also explains the concept of Inflationary Gap and Deflationary Gap
1
KEYNESIAN INFLATION
1/30/2013
Unemployment – Keynesian View
2
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According to the classical view- If the real wages are above the competitive level result in an unemployment. This happens when powerful unions raise wages to artificially high levels the result in an excess supply of labor that is called classical unemployment. Unemployment that occurs because of business cycle often called Keynesian employment which results from in sufficient 1/30/2013 agg. demand.
3
Keynesian Inflation
A group of economists including Pigou and Keynes regarded inflation as a phenomenon of full employment. In the Keynesian view rising prices in all situations cannot be termed inflation. In a situation of under employment when an increase in money supply and rising prices are accompanied by an expansion of output & employment inflation does not occur. Sometimes due to bottlenecks in the economy an increase in money supply may cause cost & prices rise more than expansion of output & employment.
1/30/2013
?
?
?
?
4
Keynesian Inflation
This is known as semi-inflation (reflation) or bottleneck inflation Once full employment level is reached the entire increase in money supply is reflected by rising prices – a case of true inflation. Thus it is more money spending but no corresponding increase in production.
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?
?
1/30/2013
Keynesian analysis of the business cycle
5
?
? ?
?
Reflation ( Prosperity ) Inflation Disinflation Deflation ( Recession )
1/30/2013
6
Keynesian analysis of the business cycle
Reflation ( Semi inflation ) – It is a situation of rising prices, deliberately undertaken to relieve a depression. With rising prices employment output & income also increased till the economy reaches the full employment level. Inflation – It occurs when prices rise after the stage of full employment is reached in the economy with no corresponding rise in employment & output.
1/30/2013
?
?
?
7
Keynesian inflation
Inflation is a long term operating dynamic process. It is a process of persistently rising prices. It is irreversible within a short time. Cyclical movement is not inflation. Inflation is a rising trend in the price level. It is a post full employment phenomenon. It is usually characterised by an overflow of money & credit.
1/30/2013
? ? ? ? ? ?
?
8
Keynesian inflation
A route cause of inflation is the expansion of money supply beyond normal absorbing capacity of the economy. Disinflation – When prices are falling due to anti inflationary measures adopted by the authorities with no corresponding decline in the existing level of employment. The result is disinflation.
1/30/2013
?
?
?
Keynesian business cycle
9
?
?
?
?
Deflation – it is a condition of falling prices accompanied by a decreasing level of employment, output & income. Deflation occurs when the total expenditure of the community is not equal to the existing prices. There is a difference between disinflation & deflation. Deflation is an under employment phenomenon.
1/30/2013
Inflationary Gap
10
?
?
?
?
The concept of inflationary gap is a tool for analyzing the pressure of inflation. The concept of inflationary gap was originated by Keynes in his pamphlet ‘How to pay for the war’. This concept stresses on the primary importance of fiscal measures such as taxes & public borrowings to wipe out the inflationary gap. Inflationary gap is an excess of total expenditure over the available output.
1/30/2013
Inflationary Gap
?
11
?
?
? ?
Total expenditure is C + I + G. The supply of goods & services depends on the condition of employment plus the technological structure. If there is an increase in I, G or both income rises but if the supply of goods & services doesn’t increase in the same proportion the inflationary gap develops. Inflationary gap is the result of excess demand. Excess demand = active attempts to purchase – available quantity of goods.
1/30/2013
?
Deflationary Gap
12
?
It is the excess of output over the demand.
1/30/2013
doc_188843965.pptx
It gives the Keynesian analysis of the business cycle. It also explains the concept of Inflationary Gap and Deflationary Gap
1
KEYNESIAN INFLATION
1/30/2013
Unemployment – Keynesian View
2
?
? ?
?
According to the classical view- If the real wages are above the competitive level result in an unemployment. This happens when powerful unions raise wages to artificially high levels the result in an excess supply of labor that is called classical unemployment. Unemployment that occurs because of business cycle often called Keynesian employment which results from in sufficient 1/30/2013 agg. demand.
3
Keynesian Inflation
A group of economists including Pigou and Keynes regarded inflation as a phenomenon of full employment. In the Keynesian view rising prices in all situations cannot be termed inflation. In a situation of under employment when an increase in money supply and rising prices are accompanied by an expansion of output & employment inflation does not occur. Sometimes due to bottlenecks in the economy an increase in money supply may cause cost & prices rise more than expansion of output & employment.
1/30/2013
?
?
?
?
4
Keynesian Inflation
This is known as semi-inflation (reflation) or bottleneck inflation Once full employment level is reached the entire increase in money supply is reflected by rising prices – a case of true inflation. Thus it is more money spending but no corresponding increase in production.
?
?
?
1/30/2013
Keynesian analysis of the business cycle
5
?
? ?
?
Reflation ( Prosperity ) Inflation Disinflation Deflation ( Recession )
1/30/2013
6
Keynesian analysis of the business cycle
Reflation ( Semi inflation ) – It is a situation of rising prices, deliberately undertaken to relieve a depression. With rising prices employment output & income also increased till the economy reaches the full employment level. Inflation – It occurs when prices rise after the stage of full employment is reached in the economy with no corresponding rise in employment & output.
1/30/2013
?
?
?
7
Keynesian inflation
Inflation is a long term operating dynamic process. It is a process of persistently rising prices. It is irreversible within a short time. Cyclical movement is not inflation. Inflation is a rising trend in the price level. It is a post full employment phenomenon. It is usually characterised by an overflow of money & credit.
1/30/2013
? ? ? ? ? ?
?
8
Keynesian inflation
A route cause of inflation is the expansion of money supply beyond normal absorbing capacity of the economy. Disinflation – When prices are falling due to anti inflationary measures adopted by the authorities with no corresponding decline in the existing level of employment. The result is disinflation.
1/30/2013
?
?
?
Keynesian business cycle
9
?
?
?
?
Deflation – it is a condition of falling prices accompanied by a decreasing level of employment, output & income. Deflation occurs when the total expenditure of the community is not equal to the existing prices. There is a difference between disinflation & deflation. Deflation is an under employment phenomenon.
1/30/2013
Inflationary Gap
10
?
?
?
?
The concept of inflationary gap is a tool for analyzing the pressure of inflation. The concept of inflationary gap was originated by Keynes in his pamphlet ‘How to pay for the war’. This concept stresses on the primary importance of fiscal measures such as taxes & public borrowings to wipe out the inflationary gap. Inflationary gap is an excess of total expenditure over the available output.
1/30/2013
Inflationary Gap
?
11
?
?
? ?
Total expenditure is C + I + G. The supply of goods & services depends on the condition of employment plus the technological structure. If there is an increase in I, G or both income rises but if the supply of goods & services doesn’t increase in the same proportion the inflationary gap develops. Inflationary gap is the result of excess demand. Excess demand = active attempts to purchase – available quantity of goods.
1/30/2013
?
Deflationary Gap
12
?
It is the excess of output over the demand.
1/30/2013
doc_188843965.pptx