Question

Write short note on demand-pull and cost-push inflation. Explain solution graphically

Answer 1

Demand pull inflation is the increase in aggregate demand in the four sectors of a macroeconomy i.e foreign buyers, firms, households and government. This is represented by a shift of the demand curve from AD1 to AD2 in the diagram below.

Cost push inflation is the decrease in aggregate supply of goods and services stemming from an increase in the cost of production.