Inflation according to causes
1. Demand Pull inflation:-
This is a situation where aggregate demand persistently exceeds aggregate supply at current prices and at full employment level of the economy so that prices keep rising or pulled upwards.
This type of inflation is usually associated with full employment situation where an increase in demand leads to an upward movement of prices. Sometimes, this type of inflation may occur with excessive exports at full employment or underfunded government spending.
Demand pull inflation is sometimes described as a situation where there is too much money chasing few goods. The demand exceeds the supply of goods, a situation mainly caused by having too much money in circulation.
- AD1 to AD2 are different levels of aggregate demand. Q2 represents output at full employment level. Increase in demand from AD1 to AD2 is accompanied by a corresponding proportionate increase in output and there is a small rise in price from PI to P2. Beyond AD2 when supply becomes inelastic, a shift in the aggregate demand is accompanied by a small increase in output leading to a very high rise in prices.