Question

Define and then explain what is Demand Pull Inflation and Cost Push Inflation.

What is the cause of each?

Answer 1

Demand pull inflation: It occurs when the aggregate demand in the economy is higher than the aggregate supply.

It is caused when there is a rise in GDP as well as employment. When households are expecting higher wages they become more confident . They start saving less and spending more.

Cost Push inflation: is defined as the rise in price level due to increase in prices of inputs like cost of raw materials, rent on capital and wages of labour.

Causes of cost push inflation may occur when workers have enough power to force the wage increase. Government regulation and taxation are other significant cause. Government policy such as minimum wage of workers, Increase in indirect taxes causes the costs of labour and raw materials to rise.