Question

Look at the US economy since the end of the Second World War and determine if it has been impacted by Cost-push or Demand-Pull inflation? Give your reasoning by explaining the type of inflation.

Answer 1

The two most important inflations in the economy are the demand pull inflation and the cost push inflation. The demand pull inflation exists when aggregate demand of the good and services is more than the aggregate supply. The inflation starts when there is more demand and supplier is unable to fulfill the demand. Thus, to decrease the demand the seller increases the price of the product. The cost push demand occurs when there is increase in the cost of producing goods and services. This is happens due to the higher resources price and higher labor cost. As the production cost increases, the aggregate supply decreases, the price level increases, and there is inflation. At the end of the Second World War the US has faced continuous increase in the inflation. The rate has increased from 3.5% per annum to 10.3% in 1942 and still gets increasing. This results in the high rate of unemployment and lower GDP growth in the Us.