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List and briefly describe three theoretical causes of inflation in the short run. If GDP is...

List and briefly describe three theoretical causes of inflation in the short run. If GDP is currently running faster than potential GDP, can we say, based on that observation alone, that inflation will rise in the near future? Why or why not?

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Answer #1

Three main causes of inflation are -

1 - Rise in the demand for goods and services due to rise in money supply in economy

2 - Rise in the cost of oil products etc leading to products becoming more costly

3 - The devaluation done by the government and trying to increase the demand in economy also leads to inflation.

Yes , if the actual GDP is running faster than the potential GDP , there will be fear of inflation. If the actual output surpasses the potential output , it will create inflationary gap in economy and reduce the value of money in economy by increasing demand in economy.

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