Macroeconomic Problems

ACCA - F1   ACCOUNTANT  IN  BUSINESS

Macroeconomic Problems: Inflation and Recession

Inflation: - Inflation diminishes value of money or decrease in purchase power of money or money can exchange less quantity of product then it used to. There are different types of inflation.

Ø  Demand pull inflation- Inflation created by increased in aggregate demand for the product is demand pull inflation. It is generally caused by increasing government purchase and increase money supply, tax reduction and increasing export.

Ø  Cost push inflation - Inflation created by increased cost (wage, price of raw material) resulting decrease in product supply is called cost push inflation. It is caused by increasing wage, profit margin and increasing price of imported raw material.

Ø  Imported inflation - Inflation due to increase in price of imports (oil, raw materials, components and products).

Ø  Monetary inflation - Inflation caused by government issuing too much of currencies and increasing money supply in the economy.

Speed of inflation: Creeping (1%-3%), Walking (3%-6%), Running (6%-10%) and Galloping (10%+)

Recession: - A period of general economic decline (lower GDP as compared to previous quarters). It is declining phase in trade cycle when falling economic activities spread across the economy. It is callused by over-pessimist behaviour in economy. Recession  increases production cost, lowers profit margin, decreases investments and employment and negatively affects money and credit market.

Ø  Boom and Bust Recession - This type of recession occurs after an economic boom. This type of recession tend to have short life.

Ø  Balance Sheet Recession - A balance sheet recession occurs when financial institutions see large decline in balance sheet due to falling asset prices and bad loans. Because of large losses, they need to restrict bank lending - leading to a fall in investment spending and economic growth. This type of recession last for long time.

Disclaimer statement: Discussion and written presentation are adjusted to personal understanding and hereby take no account for any misunderstanding by the users of this article.