Cambridge International as and a level Economics Ebook

demand-pull 
infl ation
. Th
is occurs when prices are pulled up by 
increases in aggregate demand that are not matched by 
equivalent increases in aggregate supply. 
Figure 4.9
 shows 
that an increase in aggregate demand has caused a rise in 
the price level from
 P 
to 
P
1
.
A rise in aggregate demand will have a greater impact 
on the price level, the closer the economy comes to full 
capacity.
Category
Weight
% price change
Weighted price change
Food and non-alcoholic beverages
286/1,000
1.5
0.43
Alcoholic beverages and tobacco
92/1,000
10.3
0.95
Clothing and footwear
51/1,000
2.8
0.14
Housing, water, electricity, gas and other fuels
131/1,000
4.7
0.62
Furnishings, household equipment and routine 
household maintenance
64/1,000
3.7
0.24
Health
30/1,000
5.3
0.16
Transport
147/1,000
−
0.4
−
0.06
Communications
36/1,000
1.8
0.06
Recreation and culture
48/1,000
1.2
0.06
Education
32/1,000
2.4
0.08
Restaurants and hotels
43/1,000
6.0
0.26
Miscellaneous goods and services
40/1,000
2.7
0.11
All items
1,000
3.05
Table 4.1 
Consumer price index, Mauritius
Source:
 
http://statsmauritius,gov.mu
Demand-pull inflation: 
inflation caused by increases in 
aggregate demand not matched by equivalent increases in 
aggregate supply.
KEY TERM
Figure 4.8 
Cost-push inflation
Price level
P
0
Real GDP
AD
AD
AS
AS
1
AS
1
AS
P
1
87

---

Cambridge International AS Level Economics
Increases in aggregate demand may result from, for 
instance, a consumer boom, a rise in government spending, 
higher business confi dence resulting in an increase in 
investment or an increase in net exports.
Monetarists 
argue that the key cause of higher aggregate 
demand is increases in the money supply. Th
ey suggest that 
if the money supply grows more rapidly than output, the 
greater supply of money will drive up the price level.
Monetarists: 
economists who consider that inflation is 
caused by an excessive growth in the money supply.
KEY TERM
SELF-ASSESSMENT TASK 
4.3
It is thought that infl ation in Argentina exceeded 
25% in 2013 at a time when the value of its currency, 
the peso, was falling. Th
e government had increased 
its spending by signifi cant amounts. Some of the 
population lost confi dence in the peso and switched 
to using US dollars in their transactions.
1
Explain why an increase in government spending 
may cause infl ation.
2
Explain what might cause more of the Argentinian 
population to use their own currency.
TOP TIP
Remember that once inflation is underway, it is diff icult 
to determine its cause. For instance, wages and 
consumer expenditure may be increasing but it may be 
hard to tell which occurred first and so whether inflation 
is the result of demand-pull or cost-push factors.
The consequences of inflation
Th
ere are a number of possible costs of infl ation but also 
some potential benefi ts. Th
e potential costs include:
■
 
A reduction in net exports: Inflation may reduce the 
international competitiveness of a country’s products and 
so increase import expenditure and lower export revenue. 
This may result in balance of payments problems.
■
 
An unplanned redistribution of income: Some people may 
gain and some people may lose as a result of inflation. For 
instance, if the rate of interest does not rise in line with 
inflation, borrowers will gain and lenders (savers) will lose. 
This is because borrowers will pay back less in real terms 
and lenders will receive less.
■