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EXAMINE THE CAUSES AND EFFECTS OF RISING INFLATION RATES IN AUSTRALIA.

Inflation is the general upward trend in the level of prices. Inflation causes the purchasing power of money to fall. Inflation is categorised in two types being demand-pull inflation and cost-push inflation.

One of the main causes of inflation is excess demand. If demand is growing faster than the level of supply, then prices will increase. Output will increase as well, as there is a shift along the aggregate supply curve, but because supply cannot keep up with demand prices go up as well. Demand-pull inflation will therefore occur in a booming economy. To avoid demand-pull inflation the economy should grow at a steady rate.

Cost-push inflation occurs when production costs increase. To maximise their profit, they need to increase their profit. Therefore cost increases have pushed inflation up. Cost-push inflation occurs because of different factors. Wages are a major part of the production costs and if workers demand a wage rise, firms need to increase prices to prevent fo...

Posted by: Adriana Alvarez

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