2 
vice versa. In fact, in an inflationary process the budget 
policy is continuously faced with the choice of either passing 
on their increased cost, or letting the deficit rise. 
I shall now discuss the development of inflation in the 70'ies 
especially since the recession 1974/75. I shall start from a 
certain inflation rate which was already existing and try 
to explain acceleration and especially the persistence of 
high rates of inflation over that time. 
The theoretical basis behind it is quite simple. I assume that 
cost increases are shifted on to prices by means of a mark-up. 
In general a mark-up is applied to direct costs (wages and 
materials). Under certain circumstances also an increase in 
fixed cost due to under-utilization is passed on to the buyer. 
Thus a price increase may result from increases in wage cost, 
in materials prices, in imported goods, or in indirect taxes. 
The wage cost result from changes in wages and in productivity 
I assume further that increases in prices are shifted on to 
wages in the next round: Thus when trade unions bargain for 
a certain real wage target they will base their calculation 
on the idea that the price (cost of living) increase of the 
last period must be compensated in the nominal wage increase. 
The bargaining may take into account "take home pay" and then 
also increases in direct taxes are shifted on.