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.

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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 1 year ago

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