causes

• causes of inflation

  demand pull inflation

  cost push inflation

  money supply
• demand pull inflation

  increase in demand but supply is not able to increase at the same rate. shift in demand has pulled up prices
• what causes increase in demand?

  rise in peoples incomes

  interest rates are low, high level of spending on credit

  gov has reduced rate of tax
• how can we control demand?

  increase interest rates

  increase tax

  decrease gov spending
• cost push inflation

  business costs have risen, to maintain profit margins they need to raise prices. rise in costs of production causes supply to shift to the left and prices to rise
• what causes the rise in costs?

  imported goods risen in price and have no choice but to buy (oil)

  change in value of £

  tax, forces businesses to raise prices to maintain profit
• how to reduce cost push inflation

  reduce wages. by weakening the union, limiting their power in order to try and limit wage rises
• money supply

  too much money in the economy

  if people have access to money they will want to spend it.

  if money has increased, there is no increase in goods people have to buy

  this increases prices as demand is high
• fisher equation

  Money supply X velocity of circulation = price levels X no of transactions
• what causes an increase in money supply

  banks ability to create credit

  government can increase the amount of money that they print and decisions to increase government borrowing
• how to deal with money supply

  attempt to restrict the ability of the banks to create credit by forcing them to keep larger balances in cash