ecomonic B. Now decide whether the following would contribute to demand pull or cost push inflation.

Try to explain your decision.

1. The Government increases taxes on alcohol by 5%. COST PUSH: The tax has to be paid by the seller, so it increases his costs of production; he will pass this on to the consumer as a higher price.

2. Consumers increase their spending on goods and services by 6%.
DEMAND PULL: The biggest part of Aggregate Demand is C [Consumer spending]

3. Factory workers achieve an 8% rise in their wages.
COST PUSH: Wages are an income paid to labour, and are a big cost of production.

As well, since higher wages will then give the factory workers more disposable income, there will also be DEMAND PULL inflation.

4. The Australian dollar depreciates, increasing the cost of imports and imported raw materials.
COST PUSH: when the Australian producer buys these imports, they will cost more in Australian dollars, so the producers’ costs of production will be higher.

5. The Reserve Bank decreases official interest rates by 0.5%
DEMAND PULL: lower interest rates mean it is cheaper to borrow money, so both C and I will increase.
[Consider what happens if the Reserve Bank increases official interest rates by 0.5%.]

6. The Government requires GST BAS (Business Activity Statements) to be completed by businesses every month.
COST PUSH: this requirement means that each business will need more resources [ eg labour, capital and enterprise ] to fulfil this legal obligation…”compliance costs”

7. An important car parts supplier has stopped production and delivery of parts, disrupting the country’s automotive industry.
COST PUSH: Parts [eg car seats, central locking devices] are inputs needed to produce the cars. This disruption will make it harder to finish the cars, and make them more expensive to buy.