Answer to Question #241348 in Macroeconomics for Birte

Question

Distinguish between demand pull inflation and cost push inflation.which of the two types is most likely to be associated with negative Gdp gap?which with a positiveGDP gap?

Answer 1

Solution:

Demand push inflation refers to inflation that occurs when aggregate demand increases more than the aggregate supply within the economy. It can be caused by the expanding economy and increased government spending.

Cost-push inflation on the other hand is inflation that arises when costs of production increase resulting in a decrease in aggregate supply.

 

Cost-push inflation is associated with a negative GDP gap since producers have fewer products due to the increased cost of production which makes them produce fewer products.

Demand-push inflation is associated with a positive GDP gap since it arises when the aggregate demand in an economy surpasses aggregate supply. It involves inflation rising as real GPD increases.