Inflation

Question 1

Demand pull inflation

Answer 1

• rising price level caused by increase in AD
• extension in supply & therefore higher level of output
• more pressure on FoP which increases prices
• firms increase prices to maintain profit margins (demand pull inflation)

Question 2

Cost push inflation

Answer 2

• increases in costs of production cause rising price level
• to maintain profit margins firms pass on extra costs (higher prices)
• reduce supply
• left shift in SRAS results in increases in price level (cost push inflation)

Question 2

Import cost inflation

Answer 2

• world economy booming = more demand for commodities = higher prices of commodities
• weaker exchange rate = higher costs
• stronger exchange rate = lower costs