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Keynesian Theories on Inflation

By Bernard

This section will be the deeper analysis of certain aspects in inflation. I will start by mainly exploring Keynesian’s theories of inflation and its several sections. Keynesian economic theory says that money is transparent to real forces in the economy, and that visible inflation is the result of pressures in the economy expressing themselves in prices.

Within this theory there are 3 main ideas.

  1. Demand-pull inflation: This is caused when the economy of a nation, private and government spending is high causing high demands then therefore raises the prices because of the high demand. This is also depends on the supply of the money itself.
  2. Cost-push inflation also referred to as “supply shock inflation”: Which is basically the opposite of demand-pull inflation. It is when the supply is decreasing but not the demand. It makes the value of the product increase. A perfect would be oil. If there is a shortage on the supply going out, it is guaranteed that the price will go up.
  3. Built-in inflation: Is caused because it involves workers trying to keep their wages up , therefore the employers raises the prices of their product to keep balance of profit.

Demand pull inflation graph


   

Cost-Push inflation


Phillips Curve

These were the 3 main theories. There are also a few more concepts adapted by the Keynesian theory, I will briefly again explain a few of them. The most important one would be the relationship between inflation and employment which they called the Phillips Curve. This model proposes that between stability and employment there is a trade-off.  Therefore, some level of inflation could be considered desirable in order to minimize unemployment.

Phillips Curve graph

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