Question

Take a look at Figure 11-11. If this country's government decides to enact short-term barriers to international trade and substantial regulations of domestic businesses, what happens to the short-run equilibrium price level, and why? Is this an example of demand-pull or cost-push inflation? Explain.

Short answer

In the short-run equilibrium price level, domestic business will increase and this is an example of demand-pull or cost-push inflation

Step-by-step solution

introduction

Cost-push inflation is the inflation made when AS misses the mark concerning AD due to a lessening in AS coming about because of increasing expenses of creation. Demand-pull inflation is the inflation made when AD surpasses AS due to an expansion in AD.

explanation

At the point when government forces limitations on worldwide exchange and organizations, expenses of creation rise. Subsequently, short-run AS diminishes and the short-run AS bend movements to one side from SRAS$1$to SRAS$2$. The new short-run harmony is achieved at point E$2$where SRAS$2$and the AD bend, AD$1$meeting. At E$2$, the cost level is $115$, which is more prominent than the value level of $110$ at E$1$. Accordingly, there is inflation. Since this inflation has been brought about by increasing the expenses of creation, it is cost-push inflation.