Buy custom The Reltaionship between Devaluation and Inflation
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A devaluation could cause inflation for 3 reasons.
Firstly, there is likely to be an increase in AD. AD = C+I+G+X-M, Therefore if exports are cheaper will be more exports sold , imports will fall. If the economy is close to full capacity then higher AD will cause inflation.
Diagram: Demand Pull inflation
However, increased AD may not cause inflation it depends on various factors:
a) If the economy is in recession and there is spare capacity there will not be inflation
b) IF other components of AD are not increasing (e...
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A devaluation could cause inflation for 3 reasons.
Firstly, there is likely to be an increase in AD. AD = C+I+G+X-M, Therefore if exports are cheaper will be more exports sold , imports will fall. If the economy is close to full capacity then higher AD will cause inflation.
Diagram: Demand Pull inflation
However, increased AD may not cause inflation it depends on various factors:
a) If the economy is in recession and there is spare capacity there will not be inflation
b) IF other components of AD are not increasing (e...
Essay fragment
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