Page 120 - F1 - AB Integrated Workbook STUDENT 2018-19

Chapter 7

9.7 Inflation

Type Comments/policies

Demand pull (too much money
chasing too few goods)

 Due to excessive aggregate  Reduce aggregate demand by
demand (Keynes) raising interest rates, increasing tax
and cutting government spending.
 Due to excessive growth in the
money supply (Monetarists)  Monetarists would argue you need
to slow the growth in money supply
by increasing interest rates.

Cost push

 Cost of factors of production  Firms want a target margin so put
increases up prices.

 Strengthening currency can reduce
imported inflation.

Expectations effect

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

Imported inflation

 If national currency weakens, cost  Can be reduced by policies to
of imports rise, leads to domestic strengthen the national currency.
inflation

Monetary inflation

 Increasing money supply increases  Monetarists argue should be
purchasing power of the economy, controlled through increased
boosting demand for goods and interest rates, which will reduce the
services. If occurs faster than growth in money supply.
expansion in supply, inflation can
arise

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