CIMA BA1 Syllabus A. Macroeconomic And Institutional Context Of Business - Inflation And The Trade Cycle - Notes ^{12 / 17}

Demand-Pull Inflation

Caused by an increase in the general level of economic activity

• The trade cycle is at its boom phase

• Aggregate demand may rise above aggregate supply

• Labour is at full employment, and factories are at full capacity

• So higher demand can't be met by more supply - so firms put the prices up on those they can supply i.e Inflation

Cost-Push Inflation

Caused by a general increase in costs of production

This can come from:

• Higher wages demanded by workers

• Commodity prices (eg oil) increase

• Home currency weakens - so imports become more expensive

Inflationary gap

If demand exceeds capacity (full employment) there is what we call... an inflationary gap

• This type of Inflation can be reduced by shifting the demand curve left