INFLATION Demand Pull and Cost Push Inflation Demand

INFLATION Demand Pull and Cost Push Inflation

Demand Pull Inflation Too much money chasing too few goods. • AD > AS • The AD Curve shifts to the right • Caused by a change in C, I, G, X or M Price Level AS PL 1 PL e AD Ye Y 1 AD 1 Demand Pull Inflation • Real GDP increases • Price level increases Real GDP

Increase in business confidence Increase in consumer confidence Rising household incomes due to a decrease in direct tax Increase in Consumption Increase in Investment Decrease in interest rates Demand Pull Inflation Decrease in interest rates Increase in inflationary expectations Increase in demand for NZ products abroad. Increase in Net Exports Depreciating $NZ results in increased exports and a decrease in imports Increase in government spending or decrease in tax Government runs a budget deficit - (G>T)

Cost Push Inflation • The AS Curve shifts to the left (inwards) • Caused by rising costs of production AS 1 Price Level AS Cost Push Inflation • Real GDP decreases • Price level increases PL 1 PL e AD Y 1 Ye Real GDP

Decrease in productivity Increase in nominal wages Supply shocks, e. g. earthquakes, floods, drought, wars. These cause AS to shift left Increase in price of raw materials due to increase in world prices, e. g. Increase in the price of oil Cost Push Inflation Increase in cost of imported raw materials due to a depreciation in the $NZ. Increase in indirect taxes such as GST, import tariffs and excise taxes on petrol, cigarettes and alcohol