What are the theoretical reasons behind inflation?
The monetary theory of inflation asserts that money supply growth is the cause of inflation. Faster money supply growth causes faster inflation. In particular, 1% faster money supply growth causes 1% more inflation. With other things constant, the price level is proportional to the money supply.
Why does government spending increase aggregate demand?
The increased government spending may create a multiplier effect. If government spending causes the unemployed to gain jobs, then they will have more income to spend leading to a further increase in aggregate demand. If there is higher government spending, this growth rate continues.
What is secular stagnation hypothesis?
In economics, secular stagnation is a condition when there is negligible or no economic growth in a market-based economy. Warnings of impending secular stagnation have been issued after all deep recessions since the Great Depression, but the hypothesis has remained controversial.
What does increased borrowing mean for a household?
These changes enhance households’ ability to smooth their consumption and are therefore likely to make the average household better off. When an increase in borrowing is driven by increases in demand for credit, the effect on a household’s well-being depends on the reasons for the increase in demand.
What is Keynesian theory of inflation?
Keynes and his followers emphasise the increase in aggregate demand as the source of demand-pull inflation. When the value of aggregate demand exceeds the value of aggregate supply at the full employment level, the inflationary gap arises. …
Does government spending affect economic growth?
Government spending reduces savings in the economy, thus increasing interest rates. This can lead to less investment in areas such as home building and productive capacity, which includes the facilities and infrastructure used to contribute to the economy’s output.
How can an increase in government spending reduce unemployment?
Expansionary Monetary Policy to Reduce Unemployment When it’s easier to borrow money, people spend more money and invest more. This increases aggregate demand and GDP and decreases cyclical unemployment.
Are households net borrowers?
A net borrower is any entity that borrows more than it lends out. While it can apply to any business entity, household, individual, or organization, it is most often discussed with regard to governmental entities.
Does greater inequality lead to more household borrowing?
Our empirical results show that as local inequality increases, the supply of credit to low-income households declines: these households borrow less at a higher cost.