Demand Pull Inflation – Types of Inflation | Macroeconomics

Demand Pull Inflation

Demand Pull Inflation

Demand-pull inflation occurs when the aggregate demand for goods and services exceeds the aggregate supply of goods and services at existing prices, that is, when goods and services are in excess demand. This type of inflation increases jobs and stimulates the economy, but it also increases the price of goods. Due to a lack of needed supply, businesses raise prices in order to meet the increased demand. Historically, this is the most common reason for inflation. The demand-pull theory explains inflation in economics by describing the effects of imbalanced aggregate supply and demand. Basically, when the demand for a product exceeds the supply, the price rises. Many economists refer to this phenomenon as “too many dollars chasing too few goods.”

Demand-pull inflation causes higher prices because it shifts the demand curve to the right. This results in more products and services being demanded by more buyers. Buyers will pay higher prices for the limited supply if the supply doesn’t increase proportionally to demand.

 

Causes of Demand Pull Inflation 

Demand Pull Inflation is caused by the following Factors: 

  1. Rising Inflation Rate
  2. A Growing Economy (Overall Economic Growth)
  3. Lower interest rates
  4. Over-Expansion of the Money Supply
  5. Discretionary Fiscal Policy
  6. Strong Branding
  7. Rising real wages
  8. Government spending
  9. Increasing export demand
  10. Technological Innovation

Pros and Cons of Demand Pull Inflation

 

The Advanatges and Disadvantages of Demand Pull Inflation are as follows:

Pros of Demand Pull Inflation 

Cons of Demand Pull Inflation

  • Wage Adjustments
  • Promotes the Economic Growth
  • Increased Jobs
  • Benefit to Borrowers
  • Benefit to Government 
  • Price increases.
  • High inflationary pressures
  • Deflates/Fall in the value of the Money
  • Lower standard of living
  • Increases Borrowing Costs

How does Demand Pull Inflation differ from Cost Push Inflation

Demand Pull Inflation

Cost Push Inflation

Demand Pull Inflation is a type of Inflation that occurs when aggregate demand exceeds the aggregate supply for the goods and services at existing prices.Cost Push Inflation is a type of inflation when aggregate demand remains constant but there is a decline in aggregate supply due to external factors that cause rise in price levels.
In Demand Pull Inflation , Aggregate demand increases.In Cost Push Inflation , Aggregate demand remains constant.
Demand Pull Inflation is caused by Monetary and real factors.Cost Push Inflation is caused by Monopolistic groups of the society.

Demand Pull Inflation Quiz / MCQs / FAQs

 

An appropriate fiscal policy for severe demand pull inflation is 

An appropriate fiscal policy for severe demand pull inflation is

a) an increase in government spending.
b) depreciation of the dollar.
c) a reduction in interest rates.
d) a tax rate increase.

d) a tax rate increase.

Graphically, demand-pull inflation is shown as a  

Graphically, demand-pull inflation is shown as a

a) rightward shift of the AD curve along an upsloping AS curve.
b) leftward shift of the AS curve along a down-sloping AD curve.
c) leftward shift of AS curve along an upsloping AD curve.
d) rightward shift of the AD curve along a down-sloping AS curve.

a) rightward shift of the AD curve along an upsloping AS curve.

The government’s fiscal policy options for ending severe demand-pull inflation include  

The government’s fiscal policy options for ending severe demand-pull inflation include

 

a) reducing government spending, increasing taxes, or both.
b) increasing interest rates, increasing taxes, or both reducing government spending.
c) increasing interest rates, or both.
d) increasing interest rates, reducing the money supply, or both.

a) reducing government spending, increasing taxes, or both.

 

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