effects of demandpull inflation and costpush inflationSoluti

effects of demand-pull inflation and cost-push inflation?

Solution

Demand-pull inflation occurs when aggregate demand (AD) increases faster than aggregate supply (AS), therefore AD curve shifts rightward. As a result, price level rises causing inflation, and real GDP increases, raising income, output and employment in the economy.

In contrast, cost-push inflation arises from higher cost of inputs, causing firms to lower production. As a result, AS decreases, shifting AS curve leftward, which increases price level causing inflation, but decreases real GDP, lowering income, output and employment. This is called Stagflation.