Inflation

• What is inflation?

  Inflation is the rise in prices.
• What can cause inflation to rise?

  Higher costs and increased consumer demand
• What are the two main types of inflation?

  • Cost-Push Inflation
  • Demand-Pull Inflation
• What is cost-push inflation?

  Inflation caused by rising production costs
• How does cost-push inflation affect prices?

  Producers pass higher costs to consumers
• What happens to the aggregate supply curve during cost-push inflation?

  It shifts to the left
• What is a wage-price spiral?

  Price rises lead to further wage demands
• What can cause a rise in wages?

  Wages rising above productivity increases
• How do rising costs of imported raw materials affect inflation?

  Producers pay more and set higher prices
• What happens if a country's currency decreases in value?

  Producers pay more for imports
• How do indirect taxes affect inflation?

  They increase costs and prices
• What is demand-pull inflation?

  Inflation caused by excessive aggregate demand
• What shifts the aggregate demand curve during demand-pull inflation?

  Growth in aggregate demand
• What can high consumer spending indicate?

  Confidence in future employment prospects
• How do low interest rates affect consumer spending?

  They encourage cheap borrowing and spending
• What can cause high foreign demand for exports?

  Rapid economic growth in other countries
• What happens when the money supply grows faster than output?

  It leads to a rise in prices
• What is meant by "too much money chasing too few goods"?

  Money supply exceeds goods and services output
• What are bottleneck shortages?

  Shortages when resources are fully used
• How can shortages lead to inflation?

  They cause prices and costs to rise
• What are the causes of cost-push inflation?

  • Rising costs of inputs to production
  • Increased wages above productivity
  • Higher costs of imported raw materials
  • Increased indirect taxes
• What are the causes of demand-pull inflation?

  • High consumer spending
  • Money supply growing faster than output
  • Bottleneck shortages