Q.Distinguish between demand-pull inflation and cost-push inflation.

Inflation is classified by whether prices are pulled up from the demand side or pushed up from the cost side.

Inflation is classified by its cause into two types.

Demand-pull inflation occurs when aggregate demand rises faster than aggregate supply — 'too much money chasing too few goods'. When buyers wish to spend more than the economy can produce at current prices, prices are pulled up. Its causes include an increase in the money supply and easy credit, higher government spending and deficits, rising consumer demand, and increased exports. Typically, output and employment rise along with prices.

Cost-push inflation occurs when the costs of production rise and firms pass the higher costs on as higher prices, even without an increase in demand — prices are pushed up. Its causes include rising wages (wage-push), higher prices of raw materials and imported inputs (e.g. crude oil), higher indirect taxes, and higher profit margins by firms with market power. Here, prices rise even as output and employment may fall — the combination known as stagflation.

Key distinctions:

1. Source: excess demand (demand-pull) vs rising costs (cost-push). …

The classic mistake is confusing the two directions of causation. Use the words themselves as a memory aid: demand pulls prices up (from the buyers' side) …