Relationship between Economic Growth and inflation HELP (1 Viewer)

[nikitasuitsrevenge]

the thing i don't get is that if economic growth occurs, wouldn't prices go do due to businesses achieving economies of scale, why would inflation occur? but then again, increase in aggregate demand (economic growth) would cause demand pull inflation, which increases inflation. are they both right? so, high economic growth usu. means high inflation, but it doesn't have to be right?

wait, is it in the short run, economic growth will increase inflation due to increased aggregate demand in comparison to aggregate supply, firms aren't able to adapt to this change in consumer demand, but in the long run, economic growth will reduce inflation due to businesses achieving economies of scale, hence spread cost benefits to consumers. Inflation however is always a constraint on economic growth, as it reduces international competitiveness, and then reduces export income, and therefore reduces economic growth.

 

[dunjaaa]

Bear in mind, any autonomous increase in the components of AD will lead to economic growth. But if a corresponding increase in AD is not satisfied by AS, then this is what creates demand-pull inflation. Sustainable economic growth will reduce inflation in the long term. In most cases economic growth often exceeds the productive capacity growth due to supply constraints (e.g. infrastructure bottlenecks), thus economy cannot expand it's PPF. We know that in order for an economy to increase AS, microeconomic reforms/policies must be implemented. However, microeconomic policies are long term and require a substantial time period before having an impact on AS. That's why the key instruments used by the government to maintain price stability are macroeconomic policies which are much faster to implement and have an immediate effect on AD in the short to medium term, ensuring that economic growth can be sustained with increases in AS. Hopefully that answers your query!

 

[Cleavage]

Bear in mind, any autonomous increase in the components of AD will lead to economic growth. But if a corresponding increase in AD is not satisfied by AS, then this is what creates demand-pull inflation. Sustainable economic growth will reduce inflation in the long term. In most cases economic growth often exceeds the productive capacity growth due to supply constraints (e.g. infrastructure bottlenecks), thus economy cannot expand it's PPF. We know that in order for an economy to increase AS, microeconomic reforms/policies must be implemented. However, microeconomic policies are long term and require a substantial time period before having an impact on AS. That's why the key instruments used by the government to maintain price stability are macroeconomic policies which are much faster to implement and have an immediate effect on AD in the short to medium term, ensuring that economic growth can be sustained with increases in AS. Hopefully that answers your query!

solid answer/10

late 90's - pre GFC saw high growth (and low unemployment) and simultaneous low inflation. This is an example of increases in AD being met by increases in AS (technological development expanded production capacity). In this sense, the economy experienced AD growth and business achieved economies of scale.

Both can happen at same time. It's not specifically inflation happens in short term, and economies of scale happens in long term.