Question

Explain the two types of inflation and what causes each one.

Answer 1

Ans:

The two types of inflation are demand pull inflation and cost push inflation.

Demand pull inflation :

Inflation means the increase in the prices of goods and services.if inflation is caused due to increase in the demand it is called demand pull inflation.Demand pull inflation occurs when aggregate demand in the economy grows faster than the aggregate supply.This is because when demand increases, firms will respond by increasing prices.

Cost push inflation:

This is caused due to increase in the prices of raw material and other factors such as taxes.The increase in the prices of raw material, increases the cost of production thereby causing the aggregate suppy to shift to left.Since inflation is caused due to increase in cost, it is called cost push inflation.