Government and the Macroeconomy · 4 question types
Past paper frequency (2018 to 2024)
This topic accounts for approximately 17% of your exam marks.
Inflation causes (demand-pull vs cost-push), effects on different groups, and measurement appear in almost every series; 8 to 15 marks per paper.

The syllabus splits inflation into two types according to its underlying cause.
Demand-pull inflation is caused by excessive aggregate demand in the economy, meaning too much total spending relative to what the economy can produce. Often summarised as "too much money chasing too few goods".
When aggregate demand (AD) rises faster than aggregate supply (AS), firms cannot ramp up output quickly enough to meet the extra spending. They respond by raising prices to ration their limited output to the most willing buyers.
Typical causes of rising AD:
On an AD-AS diagram, demand-pull inflation appears as the AD curve shifting right, raising both the price level and real GDP.
Cost-push inflation is caused by rising costs of production (such as higher wages, raw-material prices, or import prices) that firms pass on to consumers as higher prices.
The mechanism: firms see their per-unit cost rise; to keep profit margins acceptable, they raise selling prices. Households and other firms then pay more for everything that uses those inputs.
Typical causes of rising costs:
On an AD-AS diagram, cost-push inflation appears as the AS curve shifting left, raising the price level but reducing real GDP at the same time (called stagflation when severe).
| Demand-pull | Cost-push | |
|---|---|---|
| Underlying driver | Too much spending (high AD) | Higher production costs |
| What happens to AD/AS | AD shifts right | AS shifts left |
| Effect on real GDP | Rises | Falls |
| Effect on employment | Rises (more output, more jobs) | Falls (firms cut output) |
| Typical real-world trigger | Tax cut, rate cut, export boom | Oil-price spike, weak currency, wage surge |