Answer to Question #240171 in Macroeconomics for Elly Jacira

Question

With aid of a diagram difference between cost push inflation and demand pull inflation

Answer 1

Cost push inflation takes place when a business respond to rising costs by increasing prices to protect profit margins. On the graph there is inward shift of the short run aggregate supply curve. SRAS fall causes contraction of GDP and a rise in prices.

Demand pull inflation on the other side occurs when aggregate demand grows rapidly leading to increased pressure on scarce resources. It becomes a threat to an economy when a country's GDP rises faster than the long run trend growth of potential GDP.