4.3.2 Causes of Inflation

• Demand-pull inflation occurs when there is strong demand
• What is the primary cause of demand-pull inflation?

  Strong consumer demand
• Cost-push inflation occurs when businesses raise prices due to increased production costs.


  True
• Cost-push inflation forces businesses to raise their prices to maintain profit margins
• What type of fiscal policy can contribute to demand-pull inflation?

  Expansionary fiscal policy
• Demand-pull inflation is driven by strong consumer demand outpacing the ability of producers
• Steps in the built-in inflation cycle

  1️⃣ Expectation: Consumers expect prices to rise

  2️⃣ Wage Increase: Higher wages are paid to workers

  3️⃣ Price Rise: Businesses increase prices

  4️⃣ Cycle Repeats: Consumers expect prices to rise further
• Demand-pull inflation occurs when there is strong demand for goods and services, exceeding their available supply
• What is the primary cause of cost-push inflation?

  Increases in production costs
• Why is built-in inflation challenging to control?

  It is deeply ingrained
• How do global commodity prices affect inflation?

  Higher prices increase costs
• What is the definition of inflation in economics?

  Sustained increase in prices
• Cost-push inflation is caused by strong consumer demand.

  False
• Increased government spending can boost consumer spending, leading to demand-pull inflation
• What is an example of a factor that can cause cost-push inflation?

  Rising raw material prices
• Cost-push inflation can be caused by rising wages.


  True
• Built-in inflation creates a self-fulfilling cycle driven by expectations of future price increases
• Built-in inflation is a self-fulfilling cycle driven by expectations of future price increases.


  True
• What is inflation defined as?

  Sustained increase in prices
• Match the cause of demand-pull inflation with its example:

  Strong Demand ↔️ Rapid economic growth boosts spending

  Excess Consumer Spending ↔️ Increased disposable income due to tax cuts

  Expansionary Fiscal Policy ↔️ Large government infrastructure projects
• Rising wages or higher raw material prices can cause cost-push inflation.


  True
• Match the type of government policy with its definition and tool:

  Monetary Policy ↔️ Controls money supply and interest rates, uses interest rates

  Fiscal Policy ↔️ Uses government spending and taxation, uses tax changes
• A weaker currency increases import prices, contributing to inflation