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    Demand

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    Shubham Kumar
    Demand-pull inflation occurs when aggregate demand for goods and services exceeds aggregate supply, putting upward pressure on prices. This can happen when spending increases from consumers, businesses, or the government. As demand increases, firms raise prices and wages to attract more workers to meet demand, fueling a cycle of higher incomes, spending, demand, and prices that leads to inflation. The opposite occurs when aggregate demand decreases, putting downward pressure on prices. The economy's potential output is the sustainable level of production without inflation, and inflation rises when demand exceeds potential and falls when it is below.

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    Demand

    Uploaded by

    Shubham Kumar
    21 views1 page
    Demand-pull inflation occurs when aggregate demand for goods and services exceeds aggregate supply, putting upward pressure on prices. This can happen when spending increases from consumers, businesses, or the government. As demand increases, firms raise prices and wages to attract more workers to meet demand, fueling a cycle of higher incomes, spending, demand, and prices that leads to inflation. The opposite occurs when aggregate demand decreases, putting downward pressure on prices. The economy's potential output is the sustainable level of production without inflation, and inflation rises when demand exceeds potential and falls when it is below.

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    Demand-pull inflation occurs when aggregate demand for goods and services exceeds aggregate supply, putting upward pressure on prices. This can happen when spending increases from consumers, businesses, or the government. As demand increases, firms raise prices and wages to attract more workers to meet demand, fueling a cycle of higher incomes, spending, demand, and prices that leads to inflation. The opposite occurs when aggregate demand decreases, putting downward pressure on prices. The economy's potential output is the sustainable level of production without inflation, and inflation rises when demand exceeds potential and falls when it is below.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    21 views1 page

    Demand

    Uploaded by

    Shubham Kumar
    Demand-pull inflation occurs when aggregate demand for goods and services exceeds aggregate supply, putting upward pressure on prices. This can happen when spending increases from consumers, businesses, or the government. As demand increases, firms raise prices and wages to attract more workers to meet demand, fueling a cycle of higher incomes, spending, demand, and prices that leads to inflation. The opposite occurs when aggregate demand decreases, putting downward pressure on prices. The economy's potential output is the sustainable level of production without inflation, and inflation rises when demand exceeds potential and falls when it is below.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    Demand-pull inflation arises when the total demand for goods and services (i.e.

    ‘aggregate demand’) increases to exceed the supply of goods and services (i.e.
    ‘aggregate supply’) that can be sustainably produced. The excess demand puts upward
    pressure on prices across a broad range of goods and services and ultimately leads to
    an increase in inflation – that is, it ‘pulls’ inflation higher.

    Aggregate demand might increase because there is an increase in spending by


    consumers, businesses or government, or an increase in net exports. As a result,
    demand for goods and services will increase relative to their supply, providing scope for
    firms to increase prices (and their margins – which is their mark-up on costs). At the
    same time, firms will seek to employ more workers to meet this extra demand. With
    increased demand for labour, firms may have to offer higher wages to attract new staff
    and retain their existing employees. Firms may also increase the prices of their goods
    and services to cover their higher labour costs. [ 2 ]  More jobs and higher wages increase
    household incomes and lead to a rise in consumer spending, further increasing
    aggregate demand and the scope for firms to increase the prices of their goods and
    services. When this happens across a large number of businesses and sectors, this leads
    to an increase in inflation.

    The opposite will happen when aggregate demand decreases; firms facing lower
    demand will either pause hiring or make staff redundant which means that fewer staff
    are required. This puts upward pressure on the unemployment rate. More workers
    searching for jobs means that firms can offer lower wages, putting downward pressure
    on household incomes, consumer spending and the prices of their goods and services.
    As a result, inflation will decrease.

    The supply of goods and services that can be sustainably produced is also known as the
    economy's potential output or full capacity. At this level of output, factors of production,
    such as labour and capital (which includes the machines and equipment firms use to
    produce their goods and services) are being used as intensively as possible without
    putting upward pressure on inflation. When aggregate demand exceeds the economy's
    potential output, this will put upward pressure on prices. When aggregate demand is
    below potential output, this will put downward pressure on prices.

    So how can we measure how far the economy is from its potential output (or full
    capacity) and what does this mean for inflation? While we can fairly accurately measure
    aggregate demand on a quarter to quarter basis using gross domestic product (GDP)
    data from the national accounts (see Explainer: Economic Growth), potential output is
    not directly observable − that is, we have to infer it from other evidence about the
    behaviour of the economy. For instance, just as there is a level of output where inflation
    is stable, there is also a level of the unemployment rate that is consistent with stable
    inflation. It is known as the Non-Accelerating Inflation Rate of Unemployment or NAIRU
    for short (see Explainer: The Non-Accelerating Inflation Rate of Unemployment
    (NAIRU)). When unemployment is below the NAIRU, inflation will increase and when it
    is above the NAIRU inflation will decrease.

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