Higher Indirect Taxes Imposed By The Government - 1832 Words

ïÆ' ¼ Higher indirect taxes imposed by the government – for example a rise in the duty on alcohol, cigarettes and petrol/diesel or a rise in the standard rate of Value Added Tax. Depending on the price elasticity of demand and supply, suppliers may pass on the burden of the tax onto consumers. ïÆ' ¼ A fall in the exchange rate – this can cause cost push inflation because it normally leads to an increase in the prices of imported products. For example during 2007-08 the pound fell heavily against the Euro leading to a jump in the prices of imported materials from Euro Zone countries. Cost-push inflation can be illustrated by an inward shift of the short run aggregate supply curve. The fall in SRAS causes a contraction of GDP together with a rise in†¦show more content†¦This as shown in the diagram, Demand-pull inflation happens when aggregate demand (AD) increases in an economy and intersects the short run aggregate supply curve (SRAS) to the right of where SRAS and long run aggregate supply (LRAS) cross. This causes some inflation to occur in the short run, and even more in the long run as the economy adjusts (and the labor market moves back to equilibrium). Demand-pull inflation can occur for an reason that causes AD to increase but the most common are expansionary fiscal and monetary policy, and positive expectations about the future (increased growth/income expectations). The Demand pull inflation (FIGURE 3) Again, Demand pull inflation occurs when aggregate demand and output is growing at an unsustainable rate leading to increased pressure on scarce resources and a positive output gap. When there is excess demand in the economy, producers are able to raise prices and achieve bigger profit margins because they know that demand is running ahead of supply. Typically, demand-pull inflation becomes a threat when an economy has experienced a strong boom with GDP rising faster than the long run trend growth of potential GDP. Some of the possible causes of demand pull inflation are; ïÆ' ¼ A depreciation of the exchange rate which makes exports more competitive in overseas markets leading to an injection of fresh demand into the circular flow and a rise in national and demand for factor resources – there may