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Causes of inflation – Cost push inflation Inflation is caused by:- Cost push inflation Demand pull inflation Inflation expectations Cost Push Inflation Cost-push inflation occurs when businesses respond to rising production costs, by raising prices in order to maintain their profit margins. There are many reasons why costs might rise: Rising raw materials costs – both imported and domestic. Rising labour costs Higher indirect taxes imposed by the government Cost-push inflation shifts of the short run aggregate supply curve to the left and causes a contraction of real national output Y1 to Y2) together with a rise in the general level of prices (P1 to P”) |