Theory question 107
Money and InflationSection B (answer four questions only from this section)
(a) Distinguish between cost-push inflation and demand pull inflation.
(b) Explain any four ways of controlling inflation.
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(a) Demand-pull inflation is caused by aggregate demand exceeding aggregate supply ('too much money chasing too few goods'), e.g. through increased government spending or credit expansion. Cost-push inflation is caused by rising costs of production (higher wages, raw material and fuel prices, import costs, taxes) which producers pass on as higher prices.
(b) Any four: Monetary policy: raise bank rate, sell securities in open market operations, raise reserve requirements to cut money supply.
Fiscal policy: cut government expenditure and raise taxes (surplus budget).
Increase production of goods and services.
Price control and wage restraint (prices and incomes policy).
Liberalise imports to increase supply.
Reduce costs of production, e.g. subsidies on inputs.
Show cause in (a) and how each measure reduces demand or increases supply in (b).