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Question: Write an essay to answer the following questions
a. What is meant by inflation? How do Keynesian economists distinguish the main causes of inflation?
b Examine the likely economic consequences of a reduction in the profit tax and income tax rates.
How should you interpret this question?
You should begin with a defmition of inflation and explain how inflation is different from a one-time increase in the average of all prices. Then, you need to compare and contrast the logic and causes of demand-pull inflation and cost-pull inflation respectively.
In approaching the second sub-question, you need to examine economic consequences, in particular, the changes in national income and inflation which follow a tax cut in theprofit tax and a reduction in income tax rates respectively. Although this is very much a conceptual question, you are free to provide real-world evidence to support your answer.
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