Inflation Essay

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Inflation (a) Describe the main causes of inflation. Inflation is an increase in the amount of money in relation to the supply of goods and services, calculated in percent over a base year of 12 months. The first main cause of inflation is cost-push. Cost-push inflation is inflation which rises due to the rising cost of production. Cost-push inflation also indicates that aggregate supply decreases (AS). The graph above shows a decrease in AS. The first main reason for why this happens is due to an increase in wage rate, which is the amount of money a person earns per unit of production or time period e.g. per hour/ per day. The second reason is due to an increase in raw materials for example if the raw material, oil, rises then the transportation of other goods and services e.g. food will also rise, thus causing every good or service to rise and result in an increase in inflation. The oil could have risen in the first place due to the cost of labor increasing or oil becoming a more scarce resource. Both reasons take place by increasing cost which creates cost-push inflation. The second main reason for inflation is demand-pull inflation. Demand-pull inflation is the inflation resulting from an increase in aggregate demand (AD). The graph above shows demand shifting to the right indicating demand-pull inflation. The most straight forward reason for a result of demand-pull inflation is rising consumer demand because if the nation increases their demand then it will result in an outward shift of AD. The Monetarists believe that demand-pull inflation is caused by an increase in supply. Their logic is that if there is more money in the economy, that there will be more spending. Keynesians believe that a rise in spending can be caused by increased in other factors e.g. an increase in the spending of investments (I) and an increase in the spending

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