Causes Of Inflation AS/AD Model (By Increases In AD (AD Shifts Right)) Demand Pull Inflation

Question 1

Interest rates fall

Answer 1

Household consumption will increase because the cost of borrowing is lower. Credit spending is cheaper so households, spend more on credit cards and mortgages and/ or saving is less attractive at lower interest rates as households earn less on their savings and so households increase their spending

Question 2

Disposable income rises (can occur as the economy expands - a boom/upturn in the NZ economy)

Answer 2

Household consumption will increase

Question 3

Income tax decreases

Answer 3

Household consumption increases

Question 4

Consumer confidence rises

Answer 4

Household consumption increases because consumers anticipate a stable future and their is less need to save

Question 5

Inflationary expectations

Answer 5

Household consumption increases because consumers anticipate price rises in the future so they buy now before the prices rise

Question 6

Interest rates fall

Answer 6

Investment by firms increases because the cost of borrowing for firms is lower. Investment projects will be more profitable

Question 7

Business confidence rises

Answer 7

Investment by firms increases because businesses anticipate positive revenues/profits in the future and increase in investment believing them likely to be profitable in the future

Question 8

Government spending will increase if…

Answer 8

Determined by government policy

DEFICIT = Taxes < spending : so a net injection: AD increases

SURPLUS = Taxes > government spending: so a net withdrawal: AD decreases

Question 9

Exchange rates fall

Answer 9

Export receipts increase because our exports are relatively cheaper because it takes fewer overseas dollars to pay for our exports

Question 10

Interest rates fall

Answer 10

Export receipts increase because this causes the exchange rate to falls as the demand for our dollar in the foreign exchange market falls and the supply of NZD to the foreign exchange market as funds are moved towards higher interest rates available overseas

Question 11

Booming economies overseas

Answer 11

Export receipts increase because as an economy booms, incomes from that country rise and so they spend more on goods and service - including goods we export

Question 12

Income rise overseas e.g. USA GDP rises/ economy

Answer 12

Export receipts increase because increased income means increased spending including on goods we export

Question 13

Demand for our goods overseas

Answer 13

Export receipts increase, if tastes and preferences change overseas for our goods and services demand for goods may rise e.g. increased tourists because of our green image

Question 14

Exchange rates fall

Answer 14

Import payments increase because imports are relatively more expensive because it takes more NZD to pay for the imports

Question 15

Interest rates fall

Answer 15

Import payments increase because this causes the exchange rate to fall as the demand for our dollar in the foreign exchange market falls and the supply of NZD to the foreign exchange market as funds are moved towards higher interest rates available overseas

Question 16

Incomes in NZ increase (Buy more imports)

Answer 16

Import payments increase because and increased income means increased spending, including on goods we import