Inflation in Latvia: Causes, Consequences and Government Response Inflation is a phenomenon defined as a persistent rise in prices. There are two major reasons that inflation increases, demand-pull and cost-push. Demand-pull is when the supply of products is low and the increase in demand shifts the aggregate demand curve to the right, thereby raising prices. Cost-push is when the costs of production increase and producers pass these costs onto consumers by raising prices. This causes the short run aggregate supply curve to shift to the left. There are many consequences to high inflation. One of these consequences, according to the Phillip’s Curve, is low unemployment. The theory is that as prices rise and producers make high profits, the demand for workers increases as producers require them to keep up their current levels of output. Another consequence of high inflation is that exports become less competitive, because their prices are so much higher than other countries’ e
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