Demand-Pull Inflation

When prices rise as a result of demand pressures, it is called demand-pull inflation.  The increased demand is usually a result of an increase in the money supply, or increased government spending.  When this happens, the aggregate demand curve shifts to the right.  At this new short-run equilibrium, both the output and price levels are higher.  

With real GDP above its full-employment level, the increase in GDP is not sustainable. Unemployment falls below its natural rate, which puts upward pressure on real wages and input prices.  Rising cost of production result in a decrease in short-run aggregate supply, until real GDP reverts back to full-employment GDP. Although output falls back to full-employment GDP, the price level is now even higher!

However, if the central bank continues to increase the rate of money supply, this cycle is set to continue, raising price levels in an upward spiral.  

Compare: Cost-Push Inflation

« Back to Index