(a) Explain any four causes of demand-pull inflation.
(b) Outline any four undesirable effects of inflation.
Explanation
(a) The following are some of the causes of demand-pull inflation;
(i) Excessive deficit financing resulting in increased government expenditure
(ii) Excessive bank lending for unproductive activities.
(iii) Increase in wages and salaries of workers not matched by increased productivity.
(iv) War time expenditure on arms and ammunition not accompanied by increase in the supply of goods.
(v) Increase in population which results in increase in demand without a corresponding increase in supply.
(vi) Increase in money supply due to special events e.g. election.
(vii) Excessive printing of currency by the central bank will increase money supply.
(viii) Reduction in personal income tax thereby leading to increased disposable income and demand.
(b) Some of the undesirable effects of inflation include;
(i) There is transfer of real earnings from creditors to debtors. Creditors lose as they are repaid with money that has fallen in value.
(ii) Inflation redistributes income. Fixed income earners such as pensioners and civil servants suffer.
(iii) Adverse balance of payments may occur. Rising prices of exports discourage exportation and may lead to an adverse balance of payments.
(iv) Savings is discouraged leading to low capital formation and investment.
(v) Loss of confidence in money as money loses its value.
(vi) Fall in the standard of living due to a fall in the real earnings of workers.