Q.Distinguish between demand-pull inflation and cost-push inflation, with the main causes of each.

Inflation is a sustained rise in the general price level, accompanied by a fall in the purchasing power of money.

Explanation

Inflation refers to a situation in which there is a continuous and considerable rise in the general level of prices of goods and services in an economy. It is not a rise in the price of one or two goods, but a general and persistent rise in prices. As prices rise during inflation, the value or purchasing power of money falls — a given amount of money buys fewer goods than before. Inflation is generally caused by an excess of aggregate demand over the available supply of goods (demand-pull) or …

Demand-pull inflation is a rise in the general price level caused by aggregate demand exceeding aggregate supply at full employment — a case of too much money chasing too few goods. Excess demand, arising from higher spending or money supply, pulls up prices.

Meaning

Demand-pull inflation is the type of inflation that arises when the total (aggregate) demand for goods and services in the economy is greater than the total (aggregate) supply available at the full-employment level of output. Since output cannot be increased beyond full employment in the short run, the excess demand pulls up the prices — hence the name demand-pull inflation.

Causes

Demand-pull inflation may be caused by factors that raise aggregate demand, such as:

• an increase in the money supply and easy availability of credit;
• an increase in government expenditure, especially deficit financing;
• an increase in consumer spending and investment;
• a rise in exports and incomes. …

Inflation is a persistent and appreciable rise in the general level of prices over a period of time. As prices rise, the purchasing power of money falls, so the same amount of money buys fewer goods and services.

Meaning

Inflation means a continuous and considerable rise in the general price level in an economy over a period of time. It is not a rise in the price of a single good but a rise in the average of all prices.

• When inflation occurs, the value or purchasing power of money falls, because a given sum of money buys fewer goods than before.
• It is generally caused either by an excess of demand over supply (demand-pull inflation) or by rising costs of production (cost-push inflation). …