4.3.2 Causes of Inflation

• Demand-pull inflation occurs when there is an increase in aggregate demand (AD) that outstrips the economy's ability to produce goods and services
• Match the factor with its explanation in demand-pull inflation:

  Increased Government Spending ↔️ Government investments in infrastructure, healthcare, etc.

  Lower Interest Rates ↔️ Cheaper borrowing stimulates consumer and business spending
• Investing in schools and hospitals can lead to demand-pull inflation due to increased demand for resources.


  True
• Cost-push inflation is driven by an increase in aggregate demand.

  False
• Built-in inflation occurs when wages and prices continue to rise due to expectations
• In built-in inflation, a wage-price spiral occurs when wage increases lead to price increases, which then justify further wage increases
• Cost-push inflation occurs when there is an increase in the production costs of businesses, leading them to raise their prices
• Cost-push inflation is driven by increased aggregate demand.

  False
• A policy response to cost-push inflation is to reduce costs or increase
• Built-in inflation can create a wage-price spiral.


  True
• What is an example of a global commodity that can drive imported inflation?

  Oil
• Monetary policy aims to control inflation by adjusting interest rates and money
• Raising interest rates is a common response to demand-pull inflation.


  True
• Higher demand pushes prices upward in demand-pull inflation.


  True
• A depreciation of currency makes exports more competitive
• Cost-push inflation occurs when there is an increase in the production costs of businesses
• Match the type of inflation with its primary cause:

  Cost-Push Inflation ↔️ Rising input costs

  Demand-Pull Inflation ↔️ Increase in aggregate demand
• Expectations of future inflation can drive built-in inflation.


  True
• Businesses raise prices to cover higher labor costs in built-in inflation.


  True
• Cost-push inflation occurs when businesses raise their prices to maintain profits due to increased
• Match the cause of inflation with its effect:

  Rising input costs ↔️ Prices rise as businesses pass on higher costs

  Increased aggregate demand ↔️ Prices rise as consumers bid up limited supply
• What is the primary cause of built-in inflation?

  Expectations of future inflation
• Imported inflation is caused by changes in global commodity prices or exchange
• Match the inflation policy with its description:

  Monetary Policy ↔️ Adjusts interest rates and money supply

  Fiscal Policy ↔️ Adjusts government spending and taxation

  Incomes Policy ↔️ Targets wages and prices directly