Define the two types of inflation during prosperity regime w

Define the two types of inflation, during prosperity regime, which type of inflation rate is expected to increase.

Solution

The two types of inflation are Demand Pull and Cost Push inflation.

Demand pull inflation arises when too much money chases too few goods, in the same that aggregate demand in the economy exceeds aggregate supply. Since producers cannot increase output in immediate or short run, a market shortage occurs resulting in higher price level.

Cost push inflation arises from increase in cost of production, for example, higher wage rate and material cost.

When an economy prospers, aggregate demand rises faster than aggregate supply, so demand pull inflation is at work.