Chapter 17, Problem 10AA

To determine

To evaluate: The causes behind demand pull inflation.

Explanation of Solution

Typically, the term inflation with demand-pull defines a common phenomenon. As market demand outstrips the existing supply of several forms of consumer goods, demand-pull inflation occurs causing an overall cost of living rise.

The causes of demand-pull inflation are:

1. An economy on the rise: If consumers feel secure, they 're spending more and taking on more debt. This results in a steady rise in demand which implies better prices.
2. Inflation on assets: A rapid increase in exports compels the currencies associated to be undervalued.
3. Government spending: When government spends freely, prices increase.
4. Inflation expectation: In the near future, companies will raise their prices in anticipation of inflation.
5. More money in the system: An extension of the surplus of money with too few commodities to purchase, increases the prices.

Economics Concept Introduction

Introduction: A Keynesian economics principle that explains the effects of an imbalance in aggregate supply and demand is called a demand-pull inflation. When aggregate demand greatly exceeds the aggregate supply in an economy, prices rise.