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Inflation is a sustained increase in the general price level over time within an economy It is regarded as an economic problem as it leads to a fall in the value of money or real purchasing power Inflation is caused by demand and supply pressures notably demand inflation cost inflation imported inflation and inflationary expectations Coupled with the many negative effects that Inflation burdens on the Australian economy the government sets about using a variety of macroeconomic and microeconomic policies to control the level of inflation within the economy Through the continual conduct of various policies by the Government and RBA underlying inflation had been kept at about 25 in 2002 within the target range of 2-3 after being between 6-10 in the 1980s One cause of inflation within the economy is Demand inflation or otherwise known as Demand pull inflation This is where aggregate demand exceeds Aggregate supply causing inflation to occur as supply is not being able to meet the demand within the economy The main causes of demand pull inflation is excessive growth in any of the major components of AD AD CIGX-M Increased demand leading to inflation may have been caused by increases in consumption expenditure because of 8593 confidence 8593 wages tax cuts or falls in interest rates Increases in investment spending may have been caused by tax cuts or increased depreciation allowances as outlined in the 2006 budget which increases investment and causes demand pull inflation to occur Government expenditure may increase due to a rise in Government revenue because of tax revenue allowing the government to pursue an expansionary policy within the Australian economy Increases in export income X-M may have been caused by higher investment and consumption within the domestic causing excessive demand to occur and inflation to arise Demand pull inflation is demonstrated in fig 94 shows where due to increases in real GDP from GDP1 to GDP2 demand exceeds supply causing the
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