Question

“My boss sent me back to return the milk – it’s too expensive, ʺ said the driver for middle – class american family at the checkout counter of a supermarket. ... the U.S is enjoying an unprecedented economic boom. Explain critically how this story describes demand pull inflation.

Answer 1

Answer;

Demand pull inflation;

• It is the pressure on prices which causes shortage of supply.
• In the condition of demand pull inflation, aggregate demand rises than the aggregate supply.
• In this period, GDP rises and unemployment falls.
• This is the most common cause of inflation

The causes of demand pull inflation; There can be main five reasons of demand pull inflation-

• Boost in growth of the economy- While there is a rapid increase in growth of the economy, consumers demand more as they spend more. Such as there will be more demand, higher will be the prices.
• Government spends freely and prices go up.
• Increasing cost of imported goods also increases the domestic demand.
• Cost push inflation- It is the substantial increase in the cost of the goods and services.
• Rise in exports
• In the given case, as it is given that "the U.S. is enjoying an unprecedented economic boom".
• As per Demand Pull Inflation there is a boost in growth of the economy, since of which demand increases as consumer spends which increases the prices
• In this case also, prices of milk have risen too much which becomes unaffordable.
• This is the situation of demand pull inflation as prices increase because of many factors.
• Now the reason can be a boost in economic growth as it is given in the question, as of which prices rise.