#TickleYourGreyCells - GS Economics Concepts

1. In case of Inflation: Supply Side Inflation

2. In case of deflation: Supply Side deflation

When the wages are indexed to inflation ; in (p,y) space

AD will remain constant while with the rising wages the AS CURVE WILL SHIFT UPWARD.

THUS NOW THE EQB OCCUR AT HIGHER P AND LESSER Y.

so; it is a cost pushed inflation

Sir; one policy implication will be : cost push inflation decreases the output ; so is it safe to call it is more critical a condition than it would have been in case of demand pull.

Correct me if I thought wrong

Supply side inflation. 

As demand is being checked by indexing wages accordingly, so it remains controlled. 

On the other hand for supply side, production cost may increase. For Example- wages increase,means cost of labour (factor of production) increases so producer will not be incentivised to produce more, therefore supply may decrease leading to supply side inflation.

Will lead to both, cost push inflation as well as demand pull inflation, aka Price-Wage spiral.

For example, if there is high inflation in the economy, workers will start demanding higher wages and when the employers agree to it(paying higher wages), it will mean higher cost of production for the producers, hence cost- push inflation.

Also, if workers start to receive higher wages, their purchasing power/capacity will increase, which may lead to them demanding more which may further increase the prices, hence demand pull inflation.

So, indexing wages to inflation will lead to a spiral(the price-wage spiral), wherein, higher inflation will lead to higher wages, increasing producer’s cost, further leading to increase in prices via Cost push inflation and simultaneously, higher wages may lead to more demand, further increasing the prices via demand pull inflation.

Solution to #tickleyourgreycells - 4

The question was: Inflation indexation of wages (meaning if inflation goes up, wages go up and if inflation goes down, wages go down too by a predefined formula) will lead to demand side inflation or supply side inflation? 

#tickleyourgreycells - 5

Actions of the US #Fed impact Indian government’s bond #yields. True or False? Answer in comments with your logic…

Yields mean returns of bonds.

Yes.

As US interest rate decreases, foreigners bring capital to India's growing economy ->Invest in markets ->Demand for bond rises ->Yields fall

Hello Sir,

When Fed reduces interest rates to 2% the investors will look for better investment opportunities. Hot money will come to India. The demand for bonds will increase so the discount on bonds will reduce i.e., bond prices will increase. This is where the Bond Yield reduces...

#tickleurgreycells5:-

Yes sir,Indian bond yield will be impacted.

If US increases Interest rate,people would want to invest their money in US.So they will start selling Indian bonds.Due to this stress selling,bond price will decrease.And as we know bond price is inversely proportional to bond yield,therefore bond yield will increase.

Solution to #tickleyourgreycells - 5

The question was: Actions of the US #Fed impact Indian government’s bond #yields. True or False?

If you have answered all #tickleyourgreycells correctly including this one, congratulations! You have answered 3 #upsc prelims economics questions correctly.