Demand –Pull Inflation:
Demand pull inflation represents a situation where the basic factor at work is the increase in aggregate demand for output either from the government or the entrepreneurs or the households. The pressure of demand is such that cannot be met by the currently available supply of output. For example, if in a situation of full employment, either the government expenditure or private investment increases, this generates an inflationary pressure in the economy.
Demand pull inflation represents a situation where the basic factor at work is the increase in aggregate demand for output either from the government or the entrepreneurs or the households. The pressure of demand is such that cannot be met by the currently available supply of output. For example, if in a situation of full employment, either the government expenditure or private investment increases, this generates an inflationary pressure in the economy.
The excess of aggregate demand for goods and services to the available supply of output causes the demand-pull inflation. This leads to a rise in price level.This imbalance between aggregate demand and aggregate supply may be the result of more than one force at work. As you know, aggregate demand is the sum of consumers’ spending on consumer goods and services and net investment being contemplated by the entrepreneurs. This is the basic cause for the inflation to start and when aggregate demand for all purposes exceeds the supply of goods at current prices, there is an increase in prices.
Keynes accounted the demand pull inflation in terms of excess demand for goods relative to the aggregate supply of their output. His notion of the inflationary gap represented excess of aggregate demand over full-employment output. This inflationary gap leads to the rise in prices. Thus Keynes explained inflation in terms of demand-pull forces.
The monetarist economists like Milton Friedman explained inflation in terms of excess demand for goods and services. There is an important difference between the monetarize view of demand-pull inflation and the Keynesian view of it. Keynes explained inflation as arising out of real sector forces. In his model of inflation excess demand comes into being as a result of autonomous increase in expenditure on investment or consumption. Monetarists explain the emergence of excess demand and the resultant rise in prices on account of the increase in money supply in the economy. Milton Friedman observed, ’Inflation is always and everywhere a monetary phenomenon which can be produced only by a more rapid increase in the quantity of money than in output.
Keynes accounted the demand pull inflation in terms of excess demand for goods relative to the aggregate supply of their output. His notion of the inflationary gap represented excess of aggregate demand over full-employment output. This inflationary gap leads to the rise in prices. Thus Keynes explained inflation in terms of demand-pull forces.
The monetarist economists like Milton Friedman explained inflation in terms of excess demand for goods and services. There is an important difference between the monetarize view of demand-pull inflation and the Keynesian view of it. Keynes explained inflation as arising out of real sector forces. In his model of inflation excess demand comes into being as a result of autonomous increase in expenditure on investment or consumption. Monetarists explain the emergence of excess demand and the resultant rise in prices on account of the increase in money supply in the economy. Milton Friedman observed, ’Inflation is always and everywhere a monetary phenomenon which can be produced only by a more rapid increase in the quantity of money than in output.
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