Answer to Question #147074 in Macroeconomics for Lerato Malope

Question

Graphical illustration of the demand pull inflation and provide any three of your own examples/scenario that might cause the demand pull inflation and recommend the policy tools to use in order to curb each type of inflation

Answer 1

Demand-pull inflation is caused by the excessive demand in the economy which pushes up the prices and price level. This happens because the AD curve shifts right and creates an inflationary gap in the economy.

Three examples:

1. Business become optimistic and start investing more. This leads to rising in investment and hence AD.

This can be reduced by increasing the discount rates in the economy which will make borrowing expensive.

2. People have more income than before.

This leads to a rise in demand in the economy. This can be controlled by increasing the tax rates which will reduce income and hence AD

3. Good supply leads to rising in exports. A rise in exports will lead to rising in AD.

Decreased spending of government will lead to a fall in output in the economy and hence lead to the closure of the inflationary gap.