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CAIE IGCSE Economics 4.7.3 Causes of inflation

Identify whether aggregate demand is rising or aggregate supply is falling, then trace the change through spare capacity, output pressure or production costs to the price level.

Syllabus
2027–2029
Course
Economics 0455

Exam points

  • Explain demand-pull inflation through higher consumption, investment or government spending.
  • Explain cost-push inflation through higher wages, energy prices or other input costs.
  • Use spare capacity and aggregate supply changes to judge whether stronger demand raises inflation.

4.7.3—Causes of inflation question 1

[Maximum number: 2]

Read the source material carefully before answering Question 1.

Source material: the challenges facing Pakistan

Table for Question 4.7.3—Causes of inflation question 1 — CAIE IGCSE Economics

Pakistan faces a number of economic challenges. These include responding to a rising population, improving its trade in goods balance, controlling the country's inflation rate and increasing the country's economic growth rate. To overcome these challenges, the Pakistani government is trying to increase investment. Currently, a high proportion of the country's resources are used to produce consumer goods.

The government is subsidising entrepreneurs and charities to open low-cost schools. It wants to reduce the dropout rate from schools and to raise educational standards. Some parents do not recognise the advantages that a merit good such as education can give their children, for example better health and better job opportunities. Some of the poor need their children to work from a young age to support the family. Government reforms have not yet led to a significant rise in teachers' wages but have improved school buildings and the number of children attending. The qualifications required to teach may be increased in the future.

Improved education may affect the number of skilled workers who emigrate and may raise the quantity and quality of goods and services produced. Any resulting higher income may influence the value of imports purchased, as shown in Table 1.

Table 1 GDP per head and imports per head in selected countries in 2017.

Table 1 GDP per head and imports per head in selected countries in 2017.

Pakistan has relatively high import tariffs. Revenue from import tariffs is 45%45 \% of total tax revenue. The tariffs on vehicles, some of which have inelastic demand, are particularly high. Future Pakistani tariffs may be influenced by changes in other countries' trade policies, as well as other factors.

Answer all parts to Question 1. Refer to the source material in your answers.

Identify two possible causes of demand-pull inflation in Pakistan in 2017.

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