eco-journal14 - to meet the demand and produce more at...

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DUC HOANG - ECON210 Journal date: 10/16 Lawson Boom and inflation in UK As far as the UK experience goes, the most significant example of demand-pull inflation in recent years was the Lawson Boom in the late 1980’s. Nigel Lawson as Chancellor brought interest rates down, and this, coupled with Margaret Thatcher’s expansionary fiscal policy (tax cuts, not spending) caused an expansionary shock – the economy had had a stable price level, at close to the level of the Natural Rate of Unemployment - Un (which was high, but the idea was to reduce it). However, a sudden boom in investment spending (caused by low interest rates) coupled with an equally sudden one in consumption (resulting from the tax cuts) resulted in greater than intended an expansionary shock to the system: excess aggregate demand, creating and inflationary gap. Wages rose faster than productivity, as firms rushed
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Unformatted text preview: to meet the demand and produce more at higher prices – this caused costs to rise, and then prices had to rise again: an inflationary spiral. An increased cost to suppliers (not caused by excess demand) means that they raise their prices in order to try and retain the same profit margins. When real prices become high, people start to demand higher incomes. Sometimes firms further increase prices in order to cover their new higher wage costs. Prices get higher again, and so people again demand more wages. When this happens repeatedly, it can lead to another inflationary spiral, and it is what happened to the UK economy in the late 1970’s. Source: “ The UK Recession of 1991-92 “. http://www.economicshelp.org/2008/02/uk-recession-of-1991-92.html...
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