Theory question 106
Money and Inflation(a) Define inflation.
(b) Identify any three causes of: (i) demand-pull inflation; (ii) cost-push inflation.
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(a) Inflation is a persistent rise in the general price level over a period, which reduces the value of money.
(b)(i) Demand-pull, any three: increase in money supply/excessive bank credit; increased government spending (deficit financing); rise in incomes and wages without more output; population growth; reduction in taxes; increased export earnings spent at home.
(ii) Cost-push, any three: wage increases above productivity; higher prices of imported inputs (imported inflation); rise in fuel/energy prices; higher indirect taxes; higher interest rates; currency devaluation; monopoly pricing.
Demand-pull: too much spending; cost-push: rising costs.