Answer to Question #270230 in Macroeconomics for Janine

Question

Explain, with the aid of a graph, the demand-pull inflation as a cause of inflation

Answer 1

Demand pull inflation is a type of inflation caused by excess demand. It is usually associated with full employment equilibrium where the economy has little capacity to expand output: the rate of increase in demand exceeds the rate of increase in output. The diagram below lustrates demand pull inflation.

As shown on the diagram, an increase in aggregate demand beyond the full employment equilibrium, Yf, from AD1 to AD2 creates an inflationary gap. The general price level increases from P1 to P2, causing demand pull inflation if the increase persist.