Lesson 8 - Causes of Inflation

Question 1

What are the 3 types/causes of inflation?

Answer 1

Demand Pull
Cost Push
Money Supply

Question 2

Describe Demand Pull inflation

Answer 2

Caused by excess aggregate demand
Often linked to credit boom
Economy close to full capacity

Question 3

Describe Cost Push inflation

Answer 3

Rising wage costs in labour market
Increasing raw material + component costs from domestic + overseas suppliers
Rising import prices due to falling exhange rate

Question 4

Describe Money Supply inflation

Answer 4

More money in circulation
Spending power increases
Value of money decreases, prices rise

Question 5

What are inflationary expectations?

Answer 5

Rate at which consumers expect prices to rise
Feeds through to higher wage claims + rising costs
People expect inflation to rise by 4% and request a 4% pay rise

Question 6

How do inflationary expectations affect inflation?

Answer 6

If inflation is 4% and people request a 5% pay rise, inflation will rise in proportion (Cost Push + Money Supply)