Question

Question 1 (Inflation and the Macroeconomy) Distinguish between demand-pull inflation and cos (aggregate demand/aggregate supply) model to illustrate the theoretical effects of these two types of inflation on the price level (P), employment (L) and economic growth (real GDP) the short run. Now identify the various factors that have contributed towards demand-pul inflation and cost-push inflation in South Africa and critically analyse whether they are consistent with the predictions of the AD-AS model. (20 marks) Question 2 (Global Developments) Use data to compare real GDP growth in the USA with that of South Africa over the last ter years. Plot the data using appropriate charts. Acknowledge the source of the data that yo use. Now use a short run AD-AS model to illustrate and analyse how a slowdown in economi growth in the USA could impact on employment, economic growth and the inflation rate i South Africa. Also mention how it could impact on your business organisation. (20 marks Question 3 (The Rand Exchange Rate) Use a supply-demand model to explain exchange rates and then identify factors that impacte on the performance of the rand exchange rate during the last six months. How have thes changes impacted on your business organisation and what strategy could you implement t minimise the risks associated with exchange rate volatility? (20 marks

Answer 1

Demand pull Inflation when inflation is caused by the increase in aggregate demand, then it is called as demand full inflation. It can be controlled by monetary and fiscal measures. cost-push Inflation when an increase in the price inputs, leads to decrease in Aggregate supply, it is called as cost-push inflation. It needs administrative control on price rise and income policy. Demand pull Inflation: The A_D has shifted rightwards to A_D prime and at now equilibrium E_2, prices have risen and output also increased which increased economic growth. Cost Push Inflation The SRAS has shifted leftward to SRAS prime and at new equilibrium E_2, price have risen and output has fallen and growth has reduced. The cost push inflation in south Africa was caused by the increase in the petrol price. Increase in consumption expenditure on food, Having led to demand full inflation in south Africa. Yes, the results have been consistent with AS-AB theory.