Canadian Securities Course (CSC) Level 1 Practice Exam

What are the causes of inflation?

1. Increased import tariffs and trade restrictions

2. Technological advancements and productivity gains

3. Demand pull inflation and cost push inflation

4. Decrease in consumer demand and oversupply of goods

The correct answer is: Demand pull inflation and cost push inflation

Inflation is primarily caused by two main factors: demand pull inflation and cost push inflation. Demand pull inflation occurs when consumer demand for goods and services exceeds supply, leading to higher prices. This can be driven by increased consumer spending, government expenditure, or investment. On the other hand, cost push inflation arises when the costs of production increase, causing suppliers to raise prices. This can happen due to higher wages, increased prices of raw materials, or supply chain disruptions. While increased import tariffs and trade restrictions might affect prices indirectly, they are not as direct in causing inflation as demand pull and cost push scenarios. Technological advancements and productivity gains typically lead to lower production costs and can, therefore, act as deflationary pressures rather than inflationary ones. Lastly, a decrease in consumer demand and an oversupply of goods are more likely to lead to deflation rather than inflation, as they generally result in lower prices instead of increasing them. Thus, the correct choice highlights the primary mechanisms through which inflation can manifest in the economy.