Th2.1: Causes of Inflation

Question 1

What are the two causes of inflation?

Answer 1

Demand pull

Cost push

Question 2

Define demand pull inflation

Answer 2

inflation caused by an increase in aggregate demand

Question 3

Define cost push inflation

Answer 3

inflation caused by a decrease in aggregate supply

Question 4

DP

What would happen if any factor which increases AD was to increase?

Answer 4

inflation would increase

Question 5

What will businesses do when their costs have risen?

Answer 5

increase their prices to maintain profit margins

Question 6

How can too much money in an economy lead to inflation?

Answer 6

if people have access to money they will want to spend it but if there is no increase in the amount of goods and services supplied, prices will have to rise
^^ fisher equation

Question 7

What is the fisher equation?

Answer 7

MV = PT

Question 8

What does each symbol stand for in the fisher equation?

Answer 8

M - money supply
V - speed of money circulating in economy
P - price level
T - number of transcations

Question 9

What does the fisher equation suggest?

Answer 9

an increase in money supply will lead to an increase price level