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
distinguish between industry demand and firm company demand

Determine the law of Demand Curve The law of demand can also be presented through a curve known as demand curve. Demand curve is a locus of points showing numerous alterative p

In regards to air pollution, use a diagram to show and explain how the existence of pollution can make the market equilibrium inefficient.

break event point

For some time, two firms have charged $0.90 per standard unit of crating materials for shipping a particular type of machine tool and each has been selling about 20,000 units per m

The production function is Q= 20 K0.5 L0.5 Question: For the production function Q= 20 K0.5 L0.5 determine four combinations of capital and labor that will produce 100 and 200 unit

what is traditional theory of cost/explain with suitable diagram

Q. Concept of economies of scale? Economies of scale refers to the cost advantages that a business attains because of expansion. 'Economies of scale' is a long run concept and

If a firm's organisational characteristics have not any implications for its behaviour or more possibly have implications that can be taken into account without adopting a behaviou

Fandem Technology manufactures two products using a joint process. The cost of materials going into the joint process for a typical period is $55,000, while labour and overhead to