Question

Distinguish between demand-pull inflation and cost-push inflation and then use an AD-AS (aggregate demand/aggregate supply) model to illustrate the theoretical effects of these two types of inflation on the price level (P), employment (L) and economics growth (real GDP) in the short run. Now identify the various factors that have contributed towards demand-pull inflation and cost-push inflation in South Africa and critically analyse whether they are consistent with the predictions of the AD-AS model

Answer 1

Demand pull inflation arises when price level rise because of an imbalance between aggregate demand and supply. When the aggregate demand rises, prices go up.

Cost push inflation arises because of a substantial rise in cost of important goods or services. Where there is no suitable alternative available.

Demand pull inflation increases the general price level, also there is rise in employment as that causes rise in demand, economic growth also increases, as to meet the demand production increases.

Cost push inflation, the price level is up as prices have been pushed upward. Employment decreases at it is at full capacity as firms are trying to minimise costs. Economic growth slows down as demand for goods and services decreases.

The various factors that have contributed towards inflation in South Africa are mainly external, and cost push inflation has affected it, because of which demand also slows down as prices have increased and there is no growth seen in the economy. Interest rates are elevated to keep the inflation in check and people spend more money on paying debt. They are consistent with the model in these factors such as growth slowing down and price levels rising.