cost push and demand pull inflation

• What are the two major types of inflation?

  Demand-pull inflation and cost-push inflation
• What occurs during demand-pull inflation?

  Aggregate demand shifts to the right
• What is the effect of demand-pull inflation on economic growth?

  It leads to higher economic growth
• What happens to prices during demand-pull inflation?

  Prices rise from P1 to P2
• Why does demand-pull inflation occur?

  Greater pressure on existing production factors
• What happens to the price of scarce resources during demand-pull inflation?

  The price of scarce resources increases
• How do firms respond to increased costs during demand-pull inflation?

  They pass on higher costs via prices
• What can cause aggregate demand to shift to the right?

  Lower interest rates
• How do lower interest rates affect consumer behavior?

  They make borrowing cheaper for consumers
• What is the effect of lower income tax on consumers?

  It increases disposable income
• How does a weaker exchange rate affect exports?

  It boosts net exports
• What happens when aggregate demand shifts to the right?

  Prices of goods and services rise
• What is cost-push inflation?

  It occurs when SRAS shifts to the left
• What causes higher inflation during cost-push inflation?

  Increased costs of production for firms
• How do firms react to higher production costs during cost-push inflation?

  They pass on costs to consumers
• What factors can lead to a leftward shift of SRAS?

  Increase in raw material prices
• How does an increase in wages affect production costs?

  It raises costs of production for firms
• What is the impact of higher business taxes on production costs?

  It increases costs of production
• How does a weaker exchange rate affect imported raw materials?

  It raises costs of imported raw materials
• What are the key factors leading to demand-pull inflation?

  • Lower interest rates
  • Lower income tax
  • Higher consumer confidence
  • Higher government spending
  • Weaker exchange rate
• What are the key factors leading to cost-push inflation?

  • Increase in raw material prices
  • Increase in wages
  • Increase in business taxes
  • Weaker exchange rate affecting imports
• How do demand-pull and cost-push inflation differ?

  • Demand-pull: Caused by increased aggregate demand
  • Cost-push: Caused by increased production costs