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Explain two causes of price inflation

One cause of inflation is due to the wage rate increasing at a faster rate than output. The cost of production for firms increases and to maintain profits they are likely to raise prices. When the prices rise, wage increases are demanded by employees to maintain their standard of living. This subsequent increase in wages leads to higher production costs and prices rise again. This could cause a wage-price spiral and this is a type of cost-push inflation.Another cause is an increase in bank lending. This would result in households likely spending more and consumption would increase in the economy. This would increase aggregate demand as consumption is a component of aggregate demand and demand-pull inflation would occur as goods and services are used up. This could be due to demand increasing faster than supply can grow. Prices would rise due to the rationing function of the price mechanism and inflation would occur.



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