Demand-pull inflation: spending grows faster than the economy can produce.
Animated graph
Watch the graph build step by step in study mode.
The points to remember
- Causes: higher C, I, G or X − M: cheap credit, confidence, government spending, an export boom.
- Real GDP rises with the price level.
Free preview
This is the free notes preview
You're reading the free notes. Aimnova Pro unlocks the full study experience — and you can try it with your first topic free to keep:
- FlashcardsLock in vocabulary and key terms with spaced repetition.
- Practice questionsAnswer exam-style questions and get instant AI marking.
- Mock exams & past-paper vaultSit full mocks and see exactly how examiners award marks.
- Personalised study planA daily plan built around your exam date and weak areas.
Cost-push inflation: firms' costs rise and they pass them on.
Animated graph
Watch the graph build step by step in study mode.
The points to remember
- Causes: higher wages, energy and raw-material prices, imported inputs after a depreciation, indirect taxes.
- Real GDP falls while prices rise: stagflation.
Stop wasting time on topics you know
Our AI identifies your weak areas and focuses your study time where it matters. No more overstudying easy topics.
A little inflation is normal. High or unstable inflation does damage.
Why high inflation is costly
Uncertainty
Firms cannot plan prices and costs, so they delay investment.
Redistribution
Borrowers gain, savers and lenders lose; fixed incomes and weak bargainers fall behind.
Competitiveness
Exports become more expensive than rivals': X falls, M rises.
Menu and shoe-leather costs
Re-pricing goods, and time spent avoiding holding cash.
The target: Most governments target low and stable inflation, around 2%: low enough to keep these costs small, above zero to avoid deflation.
Paper 1 asked this in November 2024, as part (a) for 10 marks; May 2026 asked for the problems of high inflation.
Explain why a government seeks to achieve a low and stable rate of inflation.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.
Animated graph
Watch the graph build step by step in study mode.
What the diagrams must show
- Axes: price level up, real GDP across.
- Demand-pull: AD shifts right. Cost-push: SRAS shifts left.
- PL1 and the higher price level marked on the axis for each.
How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |