What is the policy ‘remedy’ for each inflation: Demand-pull and Cost-push

Expert Solution

Demand pull inflation is the result of shifting the aggregate demand curve to the right beyond the full employment level. Its remedy is to reduce the money supply, increase the taxes, decrease government spending, decrease transfers, raising interest rate, etc. all these measures will depress the aggregate demand and will shift it leftwards. This will reduce the real GDP as well but inflation is reduced

Cost push inflation is the result of shifting the supply curve to the left. It can be reduced by demand side as well as supply side policies. Demand side policies are discussed in demand pull inflation. These policies will reduce inflation but will reduce GDP further. On the supply side there can be an increase in productivity, labour force, exploration of new resources, that shift the aggregate supply curve to the right. This will not only increase real GDP but also bring down inflation. These are however long term policies

Rahul Sunny answered 7 months ago

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