Demand-pull, cost-push and monetary causes of inflation

Overview

Recall questions on demand-pull and cost-push inflation, the sources of each, and the monetarist account.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What causes demand-pull inflation?

   Model answer

   Aggregate demand in the economy grows faster than aggregate supply, pulling up prices.

2. 2

   Under what economic conditions is demand-pull inflation most likely to occur?

   Model answer

   When the economy is operating close to or at full capacity.

3. 3

   Explain how cost-push inflation arises.

   Model answer

   The costs of production increase, causing firms to raise prices to maintain profit margins.

4. 4

   How can rising wages cause cost-push inflation?

   Model answer

   Higher wages increase production costs, leading firms to raise prices to maintain profit margins.

5. 5

   How can higher raw material prices contribute to cost-push inflation?

   Model answer

   Increased raw material costs raise production expenses, prompting firms to pass these on through higher prices.

6. 6

   In what way do increased energy costs lead to cost-push inflation?

   Model answer

   Higher energy costs raise the cost of production, causing firms to increase prices to protect profit margins.

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