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Economic Problem Cyclical unemployment, Recession/Stagnant Economy Expansionary Policies Fiscal Policies Increase Government Spending Decrease Taxes This is when the economy is slow and needs to speed up Types of Inflation Demand Pull Inflation This inflation occurs when household, business, government and foreign industries collectively try to purchase more output than the economy is capable of producing. In effect, the demand side of the aggregate market is pulling the price level higher Demand Pull Inflation As aggregate demand Increases then the general price level rises When total demand exceeds total supply demand pull inflation occurs If the economy is close to full capacity the effects of demand pull inflation will be greater S1 .B .A D2 D1 Real GDP Cost Push Inflation Inflation attributed to decreases in supply, primarily due to increases in production costs Cost Push Inflation S3 As cost rise it cause the aggregate supply curve to shift left so less is supplied at each price level Each time the aggregate supply curve shifts left the price rises causing inflation S2 S1 .C .B $ .A D1 Qs Economic Problem Inflation (Demand Pull or Cost Push) Contractionary Policies Fiscal Policies Decrease Government Spending Increase Taxes This is when the economy is going to fast and needs to slow down