What is demand-pull inflation? Describe how a demand-pull inflation can occur.

What is demand-pull inflation?

Describe how a demand-pull inflation can occur.

Expert Solution

Demand-pull inflation means: surplus demand and 'too much capital buying too little commodities.' The economy is at (or near) full employment/full potential. The economy should develop at a pace higher than the long-run average rate.

Demand-pull inflation happens If overall demand rises by 4%, but output capacity grows by just 2.5%; businesses would find demand surpass supply. Consequently, they reply by increasing prices.

They often recruit more employees as businesses generate more, causing a increase in jobs and a decrease in unemployment. This growing demand for labor is putting upward pressure on salaries, contributing to inflation on the wage-push. Higher wages increase employees' discretionary income, contributing to an rise in consumer spending.

Rahul Sunny answered 2 years ago

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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 economic 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.

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