Question5 10 marks a Explain costpush inflation and demandpu

Question5 (10 marks) (a) Explain cost-push inflation and demand-pull inflation. Can these happen at (4 marks) (b) What do you understand by \"hidden unemployment\" and \"labour market? (4 marks) (c) A farmer sells wheat to a flour mill for $3. The flour mill sells the flour to a baker for $4 and the baker sells the bread to the customer for $6. What is (2 marks) the same time? participation rate\"? the contribution to GDP?

Solution

a. Cost push inflation occurs when the prices in the economy are pushed up because of higher raw material prices and labour costs. It is thus inflation caused due to changes to the supply side of the economy. This will in turn effect the aggregate supply curve and cause it to shift upwards thus raising prices. Demand pull inflation is due to inflation on the demand side of the economy and so high consumption and government spending will cause demand side inflation and cause the aggregate demand curve to shift rightwards. The two can occur simultaneously in an economy as one relates to the supply side and the other the demand side.

b. Hidden iunemployment is due to that which is not picked up by unemployment measures. This maybe people who have not registered as unemployed but are basically out of a job. They thus are not part of the unemployed population but are still out of employment. The labour for participation rate is the ratio of the labour force to the total population. The labour force includes all those people who are willing and able to work.

c. The contribution GDP is $6. The final product.