Market Disequilibrium and Ways to Correct Them by the Macroeconomic Policies

Abstract

In the general economic language, any rise in prices is called inflation, but it is necessary to make a clear distinction between the causes determining a single non-continuous rise in prices and other circumstances that may cause a continuous and widespread growth of them. In the evolution of real economy various events may occur that are able to cause a rise in prices on the whole market. These are called inflation "shocks". In order to analyze these issues more deeply, we will suppose that the economy is in a long-term macroeconomic balance and currency exchange rate operates under a flexible regime. Also, in the initial state, the price level is relatively constant and gross domestic product (GDP) is at its potential level.