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Chapter 4

9.4 Inflation

Type Comments/policies

Demand-pull (too much money  Reduce AD by raising interest rates,
chasing too few goods) increasing tax and cutting
government spending.
 Due to excessive AD (Keynes)
 Monetarists would argue you need
 Due to excessive growth in the to slow the growth in the money
money supply (Monetarists) supply by increasing interest rates

Cost-push  Firms want a target margin so put
up prices
 Cost of factors of production
increases  Strengthening currency can reduce
inflation effect on imports.

Expectations effect
 Can create inflationary spiral
 Anticipated levels of inflation are
built into wage negotiations and  Prices and incomes policies may
pricing decisions help

Illustrations and further practice

Now try TYUs 18 to 21 from Chapter 4

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