(a) Explain any four causes of demand-pull inflation. (b) Outline any four undesirable effects of inflation.

Answer Details

Demand-pull inflation is a persistent rise in the general price level caused by aggregate demand growing faster than the economy's ability to supply goods and services (too much money chasing too few goods).

(a) Four causes of demand-pull inflation:

1. Increase in the money supply. When more money is put into circulation (for example by excessive borrowing or printing), spending rises faster than output and prices are pushed up.
2. Increase in government spending. Heavy public spending, especially deficit financing, raises total demand in the economy.
3. Rise in consumers' incomes and spending. Higher wages or salaries increase purchasing power and demand for goods.
4. Increase in export demand / injection of foreign exchange. Strong demand for a country's exports raises incomes and domestic spending, adding to demand pressure.

(Other valid causes: easy availability of bank credit and a fall in the desire to save.)

(b) Four undesirable effects of inflation:

1. Fall in the value of money (reduced purchasing power), so incomes buy less.
2. It hurts fixed-income earners such as pensioners and salaried workers, whose real income falls.
3. It discourages saving because money kept loses value, which reduces funds available for investment.
4. It worsens the balance of payments, since exports become expensive and less competitive while imports become more attractive.

(Other valid effects: it redistributes income unfairly from lenders to borrowers, and it creates uncertainty that discourages long-term planning.)