According to Keynesian, inflation can be caused by increase in demand and/or increase in cost.
Demand-pull inflation is a situation where aggregate demand persistently exceeds aggregate supply when the economy is near or at full employment. Aggregate demand could rise because of several reasons. A cut in personal income tax would increase disposable income and contribute to a rise in consumer expenditure. A reduction in the interest rate might encourage an increase in investment as well as lead to greater consumer spending on consumer durables. A rise in foreigners’ income may lead to an increase in exports of a country. An expansion of government spending financed by borrowing from the banking system under conditions of full employment is another cause of inflation.
An increase in demand can be met initially by utilising unemployed resources if these are available. Supply rises and the increase in demand will have little or no … Read More