Question

1. What is the difference between demand-pull inflation and cost-push inflation?
2. Why is a high rate of inflation bad for the economy?

Answer 1

demand pull inflation	Cost push inflation
It occurs when the aggregate demand Increase at higher rate than the aggregate supply	it occurs when there is an increase in input prices which results in decrease in supply of outputs & increase in cost of outputs
It is caused by increase in household income, improvement in living standard etc.	It is caused by various factors like increase in crude oil prices, irrational Agricultural production, poor infrastructure, natural calamities etc.
In this case, there is Increase in both rate of inflation and GDP.	In this case, there is an increase in rate of inflation but decrease in rate of GDP growth.

The lower rate of inflation is good for the economy because it gives little incentives to the producer to produce more. However high inflation is bad for the economy due to the following reasons –

• It will affect the consumer (specially the poorer one) because will would not be able to buy goods.

• Producers also not happy because they know that thair product will not sell.

• Savers will get negative real returns.