Demand Pull and Cost Push Inflation

1. INFLATION Demand Pull and Cost Push Inflation

2. AS AD AD1 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 • Demand Pull Inflation • Real GDP increases • Price level increases PL1 PL e Ye Y1 Real GDP

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

4. AS1 AS AD Cost Push Inflation • The AS Curve shifts to the left (inwards) • Caused by rising costs of production Price Level • Cost Push Inflation • Real GDP decreases • Price level increases PL1 PL e Y1 Ye Real GDP

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