Explain the causes and effects of inflation and suggest remedies, including strategies firms can use.

1. 1 · Define inflation and its types. A sustained rise in the general price level; creeping, galloping, hyperinflation; deflation and disinflation.
2. 2 · Explain measurement. CPI basket: index = current cost ÷ base cost × 100 (e.g. 120); inflation rate formula; CCPI and NCPI in Sri Lanka.
3. 3 · Explain the causes.
   • Demand-pull (AD shifts right)
   • Cost-push and imported inflation (SRAS shifts left)
   • Wage-price spiral
   • Excess money growth
4. 4 · Draw demand-pull and cost-push. [Diagram: two AD-AS panels, one with AD shifting right, one with SRAS shifting left]
5. 5 · Explain the effects. Fixed-income earners and savers lose, borrowers gain, uncertainty hurts investment, exports lose competitiveness; real wage example (−8.33%).
6. 6 · National remedies. Tighter monetary policy, smaller budget deficits, supply-side measures, exchange rate stability, credible targets.
7. 7 · Firm-level strategies with a Sri Lankan link. Cost control, supplier contracts, hedging, smaller packs and staged price rises, local sourcing, as Sri Lankan firms did in 2022.
8. 8 · Conclude. Controlling inflation needs the right remedy for the right cause, plus smart action by firms.

Scoring tip: Match each remedy to a cause: demand-pull needs demand restraint; cost-push needs supply-side action.