(a) Define inflation.
(b) Identify any three causes of: (i) demand-pull inflation; (ii) cost-push inflation .
Explanation
(a) Inflation is defined as period of persistence increase in the general price level of goods and services in an economy over a period of time.
A. Demand pull-inflation:
i. Increase in bank lending on activities which do not contribute to increase in output of goods.
ii. Government adopts a deficit financing or budget to provide social infrastructure.
iii. War time expenditure which may increase purchasing power in a situation of limited supply of goods.
iv. Increase in wages and salaries of workers not accompanied by increase in output
v. Expectation of a future rise in prices
vi. Misallocation or misappropriation of funds
vii. Democratisation process which increases government expenditure
viii. Increase in population not accompanied by increase in productivity.
B. Cost-push inflation:
i. Increase in cost of production as a result of increase in wages, raw materials, transport etc.
ii. Increase in interest rate on loans will raise cost of production
iii. Increase in the prices of imported inputs
iv. Devaluation or depreciation of a local currency may also increase the costs of inputs
v. Inadequate infrastructure such as electricity, poor transportation and water supply which increase cost of production
vi. Excessive government taxes on inputs.