Question

Explain in detail: A) the differences between demand-pull inflation and cost-push inflation. B). Analyze the differences between cost-push inflation and built-in inflation.

Answer 1

A)

Demand pull inflation: It occurs when there is rise in demand of good while producer cannot increase its supply immediately. It will shift demand curve to its right from AD to AD1 which raise price level from P to P1 and output level from Y to Y1. Rise in price level will raise inflation rate.

Cost-push inflation: It occurs when there is rise in cost of production for producers and they decide to reduce the production of good. It shifts aggregate supply curve of the good to its left from AS to AS1 which will result in rise in price from P to P1 and output fall from Y to Y1. Rise in price will cause inflation in the economy.

B) Cost push inflation occurs when there is rise in cost of production for producers while built in inflation occurs due to adaptive expectations when labor demand more of the wages due to overall rise in production of goods and services which reduces real wages of them. Increase in wages paid to them will raise price of goods and services.