7. Economic Performance - Inflation, Causes & Consequences

Question 1

What are the two main causes of inflation?

Answer 1

Demand pull inflation and cost push inflation

Question 2

What is the demand pull inflation?

Answer 2

This is when inflation is caused by an increase in aggregate demand – this will depend on your position along the SRAS curve.

Question 3

How/why does demand pull inflation occur?

Answer 3

As the economy moves closer to its maximum level (PPF) more pressure is put on existing labour and resources and more spare capacity is used. So the price of factors of production increases as does the wages workers want.

Question 4

What will cause demand pull inflation?

Answer 4

Anything that causes an increase in; consumption, investment, government spending or net exports.E.g. Interest rates drop - investment up etc.

Question 5

What is cost push inflation?

Answer 5

This is when the price of a factor of production or other necessary resources increases meaning firms have the increased their prices to maintain a profit margin.

Question 6

What causes cost push inflation?

Answer 6

Supply-side shocks;Increase in the price of commoditiesIncrease in the price of raw materialsIncrease in wagesIncrease in business taxesIncrease in import prices

Question 7

Which type of inflation is seen to be most severe and why?

Answer 7

Cost push inflation because unlike demand pull inflation there is a reduction in output as well as an increase in price levels.

Question 8

What are the consequences of inflation to the individual and the whole economy?

Answer 8

Falling real incomesIncreased cost of borrowingReduced business competitivenessReduced business confidenceIncreased Income inequality - increased costs for things like heating etc are regressive, effect vulnerable ppl mostDecreased standards of living