3.1.4
Causes of Inflation
Cost-Push Inflation
Cost-Push Inflation
Cost-push inflation is due to a rise in costs of production, causing the SRAS to shift up, and reducing profit margins of firms. This then prompts firms to push up the final price of goods and services to maintain profit.
Causes of cost-push inflation
Causes of cost-push inflation
- National minimum wage increases.
- Trade union wage increases.
- Increase in world commodity prices, e.g. oil price rises globally.
- External supply-side shocks, e.g. bad harvest abroad causing the price of wheat to rise.
- Rise in indirect taxes, e.g. VAT (if it is passed on to consumers).
- Rise in corporation tax (if it is passed on to consumers).
- Falling productivity (which causes unit costs to then in that each good costs more to produce).
Impact of currency depreciation
Impact of currency depreciation
- Exchange rate depreciation causes the price of imports to rise in domestic currency terms.
- Note the exchange rate depreciation could happen because of events in another country that causes their exchange rate to appreciate, so causing the Pound to depreciate.
- The Pound depreciated immediately after the EU referendum in June 2016, causing the price of imports to rise and inflation to increase.
Money Supply
Money Supply
- A growth of the money supply can also cause inflation.
- This is because more money is pushed into the economy and therefore the purchasing power of the currency decreases. This leads to price rises.
Demand-Pull Inflation
Demand-Pull Inflation
Demand-pull inflation is caused by increases in aggregate demand outstripping aggregate supply. The economy is close to full employment, and increases in AD lead to the general price level rising because supply cannot keep up with increased demand.
Causes of demand-pull inflation
Causes of demand-pull inflation
- Exchange rate depreciation – causes the price of exports to be cheaper in foreign currency terms and thus demand for exports rises. This causes the value of exports to increase, so X-M increases.
- Rising animal spirits (confidence) e.g. due to positive wealth effect from rising house prices.
- Excessive borrowing.
- Global economy experiencing faster growth in incomes and buying a lot of goods from the UK, causing UK exports and AD to rise quickly, causing demand-pull inflationary pressure.
Government causes of demand-pull inflation
Government causes of demand-pull inflation
- Excessively 'loose' fiscal policy: income taxes could be cut too much or government spending be increased too quickly.
- Excessively 'loose' monetary policy: interest rates could be cut too much or too quickly and Quantitative Easing could be too high.
1Introduction to Markets
1.1Nature of Economics
1.1.1Economics as a Social Science
1.1.2Positive & Normative Economic Statements
1.1.3The Economic Problem
1.1.4Resources
1.1.5Production Possibility Frontiers
1.1.6Specialisation & Division of Labour
1.1.7Types of Economies
1.1.8End of Topic Test - Nature of Economics
1.1.9Application Questions - Nature of Economics
1.2How Markets Work
1.2.1Rational Decision Making
1.2.2Demand
1.2.3Elasticities of Demand
1.2.4Elasticities of Demand 2
1.2.5Elasticity & Revenue
1.2.6Supply
1.2.7Elasticity of Supply
1.2.8Price Determination
1.2.9Price Mechanism
1.2.10Consumer & Producer Surplus
1.2.11Indirect Taxes & Subsidies
1.2.12A-A* (AO3/4) - Taxing Prices or Quantities?
1.2.13Alternative View of Consumer Behaviour
1.2.14End of Topic Test - Markets
1.2.15A-A* (AO3/4) - Markets
2Market Failure
2.1Market Failure
2.2Government Intervention
2.2.1Government Intervention in Markets
2.2.2Subsidies & Price Controls
2.2.3Pollution Permits & Regulation
2.2.4A-A* (AO3/4) - European Emissions Trading
2.2.5State Provision & Information Provision
2.2.6Government Failure
2.2.7End of Topic Test - Government Intervention
2.2.8A-A* (AO3/4) - Government Intervention
3The UK Macroeconomy
3.1Measures of Economic Performance
3.1.1Measuring Economic Growth
3.1.2National Income Data
3.1.3Inflation
3.1.4Causes of Inflation
3.1.5Consequences of Inflation
3.1.6Employment & Unemployment
3.1.7Causes & Impact of Unemployment
3.1.8A-A* (AO3/4) - Hysteresis
3.1.9Balance of Payments
3.1.10Current Account Deficit & Imbalances
3.1.11End of Topic Test - Economic Performance
3.1.12Application Questions Macroeconomy
3.2Aggregate Demand
3.3Aggregate Supply
3.4National Income
4The UK Economy - Policies
4.1Macroeconomic Objectives & Policies
4.1.1Possible Objectives
4.1.2Demand-Side Policies - Monetary
4.1.3Demand-Side Policies - Monetary 2
4.1.4A-A* (AO3/4) - The Future of Interest Rates
4.1.5Demand-Side Policies - Fiscal
4.1.6Demand-Side Policies in 2007-08
4.1.7Strengths & Weaknesses of Demand Side
4.1.8Supply-Side Policies
4.1.9Supply-Side Policies 2
4.1.10Conflicts Between Objectives
4.1.11A-A* (AO3/4) - Conflicting Incentives
4.1.12Phillips Curve
4.1.13End of Topic Topic - Policies & Objectives
4.1.14Application Questions - UK Policies
5Business Behaviour
5.1Business Growth
5.2Business Objectives
6Market Structures
6.1Market Structures
6.1.1Efficiency
6.1.2Perfect Competition
6.1.3Perfect Competition 2
6.1.4Monopolistic Competition
6.1.5Oligopolies
6.1.6The Prisoner's Dilemma
6.1.7Collusion in Oligopolistic Markets
6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?
6.1.9Monopolies
6.1.10Price Discrimination
6.1.11Monopsony
6.1.12A-A* (AO3/4) - Models in Economics
6.1.13Contestability
6.1.14Benefits of Contestability
6.1.15End of Topic Test - Market Structures
6.1.16Application Questions - Market Structures
6.1.17A-A* (AO3/4) - Cereal Collusion
6.2Labour Market
6.2.1Demand for Labour
6.2.2Supply of Labour
6.2.3Labour Market Imperfections
6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment
6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?
6.2.6Wage Determination
6.2.7Elasticity of Labour Supply & Demand
6.2.8Intervention in Setting Wages
6.2.9End of Topic Test - Labour Market
6.2.10A-A* (AO3/4) - Labour Markets
6.3Government Intervention
6.3.1Reasons for Government Intervention
6.3.2Government Promotion of Competition
6.3.3Usefulness of Competition Policy & Examples
6.3.4A-A* (AO3/4) - Modern Competition Policy
6.3.5Privatisation
6.3.6Government Regulation
6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation
6.3.8Government Protection of Suppliers and Employees
6.3.9Impact of Government Intervention
6.3.10End of Topic Test - Government Intervention
6.3.11Application Questions - Government Intervention
7A Global Perspective
7.1International Economics - Globalisation & Trade
7.2International Economics - Currency
7.2.1Merged Currency
7.2.2Restrictions on Free Trade
7.2.3Arguments for Protectionism
7.2.4Arguments Against Protectionism
7.2.5Balance of Payments
7.2.6Balance of Payments 2
7.2.7Floating Exchange Rates
7.2.8Fixed Exchange Rate
7.2.9International Competitiveness
7.2.10End of Topic Test - International Economy
7.2.11Application Questions - International Economics
8Finance & Inequality
8.1Poverty & Inequality
8.2Emerging & Developing Economies
8.2.1Measures of Development
8.2.2Factors Influencing Growth & Development
8.2.3Barriers to Development
8.2.4Barriers to Development 2
8.2.5A-A* (AO3/4) - The Bottom Billion
8.2.6Development Strategies
8.2.7Interventionist Strategies
8.2.8Aid
8.2.9International Institutions
8.2.10International Institutions 2
8.2.11End of Topic Test - Emerging & Developing
8.2.12Application Questions - Developing Countries
8.3The Financial Sector
8.4Role of the State in the Macroeconomy
9Examples of Global Policy
9.1International Policies
Jump to other topics
1Introduction to Markets
1.1Nature of Economics
1.1.1Economics as a Social Science
1.1.2Positive & Normative Economic Statements
1.1.3The Economic Problem
1.1.4Resources
1.1.5Production Possibility Frontiers
1.1.6Specialisation & Division of Labour
1.1.7Types of Economies
1.1.8End of Topic Test - Nature of Economics
1.1.9Application Questions - Nature of Economics
1.2How Markets Work
1.2.1Rational Decision Making
1.2.2Demand
1.2.3Elasticities of Demand
1.2.4Elasticities of Demand 2
1.2.5Elasticity & Revenue
1.2.6Supply
1.2.7Elasticity of Supply
1.2.8Price Determination
1.2.9Price Mechanism
1.2.10Consumer & Producer Surplus
1.2.11Indirect Taxes & Subsidies
1.2.12A-A* (AO3/4) - Taxing Prices or Quantities?
1.2.13Alternative View of Consumer Behaviour
1.2.14End of Topic Test - Markets
1.2.15A-A* (AO3/4) - Markets
2Market Failure
2.1Market Failure
2.2Government Intervention
2.2.1Government Intervention in Markets
2.2.2Subsidies & Price Controls
2.2.3Pollution Permits & Regulation
2.2.4A-A* (AO3/4) - European Emissions Trading
2.2.5State Provision & Information Provision
2.2.6Government Failure
2.2.7End of Topic Test - Government Intervention
2.2.8A-A* (AO3/4) - Government Intervention
3The UK Macroeconomy
3.1Measures of Economic Performance
3.1.1Measuring Economic Growth
3.1.2National Income Data
3.1.3Inflation
3.1.4Causes of Inflation
3.1.5Consequences of Inflation
3.1.6Employment & Unemployment
3.1.7Causes & Impact of Unemployment
3.1.8A-A* (AO3/4) - Hysteresis
3.1.9Balance of Payments
3.1.10Current Account Deficit & Imbalances
3.1.11End of Topic Test - Economic Performance
3.1.12Application Questions Macroeconomy
3.2Aggregate Demand
3.3Aggregate Supply
3.4National Income
4The UK Economy - Policies
4.1Macroeconomic Objectives & Policies
4.1.1Possible Objectives
4.1.2Demand-Side Policies - Monetary
4.1.3Demand-Side Policies - Monetary 2
4.1.4A-A* (AO3/4) - The Future of Interest Rates
4.1.5Demand-Side Policies - Fiscal
4.1.6Demand-Side Policies in 2007-08
4.1.7Strengths & Weaknesses of Demand Side
4.1.8Supply-Side Policies
4.1.9Supply-Side Policies 2
4.1.10Conflicts Between Objectives
4.1.11A-A* (AO3/4) - Conflicting Incentives
4.1.12Phillips Curve
4.1.13End of Topic Topic - Policies & Objectives
4.1.14Application Questions - UK Policies
5Business Behaviour
5.1Business Growth
5.2Business Objectives
6Market Structures
6.1Market Structures
6.1.1Efficiency
6.1.2Perfect Competition
6.1.3Perfect Competition 2
6.1.4Monopolistic Competition
6.1.5Oligopolies
6.1.6The Prisoner's Dilemma
6.1.7Collusion in Oligopolistic Markets
6.1.8A-A* (AO3/4) - Which Factors Affect Collusion?
6.1.9Monopolies
6.1.10Price Discrimination
6.1.11Monopsony
6.1.12A-A* (AO3/4) - Models in Economics
6.1.13Contestability
6.1.14Benefits of Contestability
6.1.15End of Topic Test - Market Structures
6.1.16Application Questions - Market Structures
6.1.17A-A* (AO3/4) - Cereal Collusion
6.2Labour Market
6.2.1Demand for Labour
6.2.2Supply of Labour
6.2.3Labour Market Imperfections
6.2.4A-A* (AO3/4) - Labour Productivity & Unemployment
6.2.5A-A* (AO3/4) - What Level of Unionisation is Good?
6.2.6Wage Determination
6.2.7Elasticity of Labour Supply & Demand
6.2.8Intervention in Setting Wages
6.2.9End of Topic Test - Labour Market
6.2.10A-A* (AO3/4) - Labour Markets
6.3Government Intervention
6.3.1Reasons for Government Intervention
6.3.2Government Promotion of Competition
6.3.3Usefulness of Competition Policy & Examples
6.3.4A-A* (AO3/4) - Modern Competition Policy
6.3.5Privatisation
6.3.6Government Regulation
6.3.7A-A* (AO3/4) - Nationalisation vs Privatisation
6.3.8Government Protection of Suppliers and Employees
6.3.9Impact of Government Intervention
6.3.10End of Topic Test - Government Intervention
6.3.11Application Questions - Government Intervention
7A Global Perspective
7.1International Economics - Globalisation & Trade
7.2International Economics - Currency
7.2.1Merged Currency
7.2.2Restrictions on Free Trade
7.2.3Arguments for Protectionism
7.2.4Arguments Against Protectionism
7.2.5Balance of Payments
7.2.6Balance of Payments 2
7.2.7Floating Exchange Rates
7.2.8Fixed Exchange Rate
7.2.9International Competitiveness
7.2.10End of Topic Test - International Economy
7.2.11Application Questions - International Economics
8Finance & Inequality
8.1Poverty & Inequality
8.2Emerging & Developing Economies
8.2.1Measures of Development
8.2.2Factors Influencing Growth & Development
8.2.3Barriers to Development
8.2.4Barriers to Development 2
8.2.5A-A* (AO3/4) - The Bottom Billion
8.2.6Development Strategies
8.2.7Interventionist Strategies
8.2.8Aid
8.2.9International Institutions
8.2.10International Institutions 2
8.2.11End of Topic Test - Emerging & Developing
8.2.12Application Questions - Developing Countries
8.3The Financial Sector
8.4Role of the State in the Macroeconomy
9Examples of Global Policy
9.1International Policies
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