Question

Explain what is meant by Demand Pull and Cost Push inflation.

How are they similar and how are they different?

Explain the difference between nominal and real inflation

Answer 1

1. Demand Pull Inflation is basically caused due to increase in the demand of goods and services in an economy. Whereas, Cost Push Inflation is caused due to the reduction in the aggregate supply, which is usually caused due to increased cost of production.

2. Differences.

Demand Pull Inflation may be caused because:-

• Increased money supply in the market(Expansionary Monitory policy of FED Reserve.)
• Currency printing by the government.
• Reduction in direct taxes.
• Black money.
• Governments public welfare schemes.

Cost Push Inflation may be caused because:-

• Hoarding and speculations.
• Reduction in subsidy by government.
• Deffective supply chain.
• Increased indirect tax.

Similarities:-

• Both affects the economic growth of the economy.
• Both reduces the efficiency of the rate of production.
• Both reduces the real income of the people.
• Both are regressive in nature, affects the poor.
• Both increase inequalities in the society.

3. Nominal value is the value of the currently produced goods and services, it is adjusted for the inflation, whereas real value is the value of goods and services produced in a particular year/ base year.