This question was quite popular among the candidates but their performance was below average. Candidates were required to define inflation and identify any three causes each of demand-pull and cost-push inflation. Majority of the candidates were able to define inflation but most of them could not state the causes of demand-pull inflation and
cost-push inflation in the (b) part of the question. Candidates were expected to answer thus to score maximum marks in this question.

(a)        Inflation is defined as a period of persistent increase in the general price level of goods and services in an economy over a period of time.                
(b)(i)    Demand pull-inflation:
(i)      Increase in bank lending on activities which do not contribute to increase in output of goods.
(ii)     Government adopts a deficit financing or budget to provide social infrastructure.
(iii)    War time expenditure which may increase purchasing power in a situation of limited supply of goods.
(iv)    Increase in wages and salaries of workers not accompanied by increase in output.
(v)     Expectation of a future rise in prices.
(vi)    Misallocation or misappropriation of funds.
(vii)   Democratization process which increases government expenditure.
(viii)  Increase in population not accompanied by increase in productivity.

 (b)(ii)  Cost-push inflation:
(i)    Increase in cost of production as a result of increase in wages, raw materials, transport etc.
(ii)    Increase in interest rate on loans will raise cost of production.
(iii)   Increase in the prices of imported inputs.
(iv)   Devaluation or depreciation of a local currency may also increase the costs of inputs.
(v)    Inadequate infrastructure such as electricity, poor transportation and water supply which increase cost of production.
(vi)    Excessive government taxes on inputs.