(a) Distinguish between cost-push inflation and demand pull inflation. (b) Explain any four ways of controlling inflation.

Answer Details

(a) Cost-push vs demand-pull inflation.

Cost-push inflation is a persistent rise in the general price level caused by rising costs of production. When wages, raw materials, energy or import prices rise, producers pass on the higher costs by raising prices, so it originates from the supply (cost) side.

Demand-pull inflation is a persistent rise in the general price level caused by total demand growing faster than the supply of goods and services (too much money chasing too few goods). It is pulled up by excess aggregate demand, often from increased money supply, government spending or exports.

In short, cost-push comes from higher production costs (supply side), while demand-pull comes from excess demand (demand side).

(b) Ways of controlling inflation:

• Monetary policy: the Central Bank reduces the money supply by raising the bank rate, selling securities (open market operations) and raising the reserve/liquidity ratios, so that less money chases goods.
• Fiscal policy: the government reduces its spending and/or raises taxes to cut excess purchasing power (aggregate demand).
• Increasing output/supply: encouraging greater production of goods and services (and imports of scarce goods) so that supply matches demand.
• Price and income (wage) control: the government fixes maximum prices and restrains wage increases to keep costs and prices down.

Any four, well explained, are acceptable.