Macro - inflation

• In the Demand pull inflation graph, why does Price level increase?

  The factors of production are becoming scarcer as the economy is getting closer to capacity, so more pressure is being put on those Factors of production. When there is pressure put on a scarce resource, it goes up in price.
• Reasons AD could shift to the right in demand pull inflation:

  >Decrease in interest rates

  >Decease in income/corporation tax

  >Increase in consumer and business confidence

  >Increase in government spending

  >Weak exchange rate
• In Demand pull inflation, which direction does AD shift?

  AD shifts to the right
• In Cost push inflation, which direction does SRAS shift?

  SRAS shifts to the left
• Why does inflation occur (price rise) in cost push inflation?

  There is an increased cost of production, so firms will increase the prices of their goods/services to make up for these costs.
• Reasons SRAS could shift to the left in Cost push inflation:

  >Increase in raw material prices

  >Increase in wages

  >Increase in business taxes

  >Increase in price of imported raw materials due to a weaker exchange rate