In: Economics
Inflation is a situation where price level of goods and services rises or purchasing power of currency falls.
Two types of inflation are: a) demand-pull inflation and b) cost-push inflation.
Demand pull inflation, is rise is price level of goods and
services caused by increase in aggregate demand in an
economy.
When demand of goods and services rises and supply remains
constant, then aggregate demand would be more than aggregate
supply. this cause rise in price level of goods and services.
Major cause of increase in aggregate demand includes increase in
money supply, expansionary monetary policy results in increase in
money supply and that causes increase in capacity to spend of
people.
Tax cuts by government also increase the demand of goods and
services as now people would have more money to spend.
Increase in government spendings also leads to increase in
aggregate demand and inflation.
b) cost-push inflation is type of inflation that accur when cost
of supply increases and it decreases the level of supply. When cost
of production rises, it discourage manufacturers to produce goods
and services, hence it effect aggregate supply in economy.
Cost of supply rises due to rise in wages, scarcity of resources,
increase in taxes and duties by government, higher exchange rates
etc.
all above causes increase the price level of goods and services and
this leads to inflation.