Demand-pull inflation, Managerial Economics

Demand-pull inflation is when aggregate demand exceeds the value of output (measured in constant prices) at full employment.  The excess demand of goods and services cannot be met in real terms and therefore is met by rises in the prices of goods.  Demand-pull inflation could be caused by:

  • Increases in general level of demand of goods and services. A rise in aggregate demand in a situation of nearly full employment will create excess demand in may individual markets, and prices will be bid upward. The rise in demand for goods and services will cause a rise in demand for factors and their prices will be bid upward as will. Thus, inflation in the pries of both consumer goods and factors of production is caused by a rise in aggregate demand.
  • General shortage of goods and services. If there is a general shortage of commodities e.g. in times of disasters like earthquakes, floods or wars, the general level of prices will rise because of excess demand over supply.
  • Government spending: Hyper-inflation certainly rises as a result of government action. Government may finance spending though budget deficits; either resorting to the printing press to print money with which to pay bills or, what amounts to the same thing, borrowing from the central bank for this purpose. Many economists believe that all inflation is caused by increases in money supply.

Monetarist economists believe that "inflation is always and everywhere a monetary phenomenon in the sense that it can only be produced by a more rapid increase in the quantity of money than in output" as Friedman wrote in 1970.

The monetarist's theory is based upon the identity:

                        M x V = P x T

And thus this was turned into a theory by assuming that V and T are constant.  Thus, we would obtain the formula

                        MV = PT

Posted Date: 11/30/2012 4:44:52 AM | Location : United States







Related Discussions:- Demand-pull inflation, Assignment Help, Ask Question on Demand-pull inflation, Get Answer, Expert's Help, Demand-pull inflation Discussions

Write discussion on Demand-pull inflation
Your posts are moderated
Related Questions
BU 5210 Final Summer 2013 Economic Analysis

I. A farmer – businessman is in a quandary as to what crop to plant in his land. He has the option to plant Crop A, Crop B, or Crop C. f the weather turns out to be good and the

What is Cyert and March's behavior theory? What are the demerits.

The relationship between, total expenditure and price elasticity of demand has summed up in the below table: Table: Elasticity and Consumption Expenditure Elas

PUBLIC SECTOR BORROWING REQUIREMENT (PSBR) Public Sector Borrowing Requirement (PSBR) is the amount which the government needs to borrow in any one year to finance an excess e

Transitional unemployment Transitional unemployment is that situation which prevails due to some temporary reasons.  The main reason for this type of unemployment are:

Arc Elasticity Is the average elasticity between two given points on the curve, i.e. Because of the negative relationship between price and quantity demanded, pr

Techniques of Managerial Economics Managerial economics draws on a wide range of economic tools, concepts and techniques in decision-making process. These concepts can be cons

Effectiveness of Trade Unions in Developing Countries Trade Unions in developing countries tend to be less effective in their wage negotiations with employers than their count

Advantages of Product Differentiation We can distinguish between those advantages for the firm itself and those for the consumer: a.          For the firm. i.