What are the two types of inflation? Of these two, which is one is usually the c

Question

What are the two types of inflation? Of these two, which is one is usually the cause behind rising prices? What empirical evidence can be provided for the previous conclusion? Why would government expenditures (spending) into the circular flow not generally lead to inflationary pressures? Is there a trade-off between inflation and unemployment? Why or why not? What are the orthodox and heterodox assumptions behind the equation of exchange (MV = PY) and the consequences and outcomes of these assumptions? (Your answer should also include the direction of causation.) Of the two approaches regarding the equation of exchange, which is endogenous money and which is exogenous money? Explain what this means. What comprises the actual money supply and what does this have to do with inflation? What entity actually creates the majority of the money supply?

Explanation / Answer

Multiple questions asked.

First 4 are answered below.

1. What are the two types of inflation?

Inflation refers to the increase in the general price level in the economy. There are 2 types of inflation: Demand pull and Cost push.

2.Of these two, which is one is usually the cause behind rising prices?

Demand pull inflation refers to increase in price of goods arising because of increased demand for a good, increasing the demand and thus price levels.

Cost push inflation refers to increase in price of goods arising because of increased input costs of the goods, thereby shifitng the final goods prices upwards.

Both of the types of inflation lead to increased prices.

3. What empirical evidence can be provided for the previous conclusion?

The paper 'Cost push versus Demand pull inflation: Some empirical evidence' by Barth and Bennett shows such empirical evidence on both types of inflation.

4. Why would government expenditures (spending) into the circular flow not generally lead to inflationary pressures?

This is because government expenditure is absorbed in the economy in the form of spending on infrastructure and other development and welfare programs, that they benefit the consumers indirectly and not directly. This implies consumers are better off, but they do not have more incomes in their hands, and thus their demand remains constant, leaving prices unchanged.

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