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    Demand-Pull Inflation & Cost-Push Inflation

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    Alec Hope Buenaventura
    Cost-push inflation occurs when a key input such as oil increases in price, reducing aggregate supply. Demand-pull inflation happens when aggregate demand increases due to factors like higher foreign GDP or business optimism. Cost-push inflation is more serious as it stems from production costs and is difficult to address with monetary policy alone, potentially leading to hyperinflation.

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    Demand-Pull Inflation & Cost-Push Inflation

    Uploaded by

    Alec Hope Buenaventura
    50 views4 pages
    Cost-push inflation occurs when a key input such as oil increases in price, reducing aggregate supply. Demand-pull inflation happens when aggregate demand increases due to factors like higher foreign GDP or business optimism. Cost-push inflation is more serious as it stems from production costs and is difficult to address with monetary policy alone, potentially leading to hyperinflation.

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    Cost-push inflation occurs when a key input such as oil increases in price, reducing aggregate supply. Demand-pull inflation happens when aggregate demand increases due to factors like higher foreign GDP or business optimism. Cost-push inflation is more serious as it stems from production costs and is difficult to address with monetary policy alone, potentially leading to hyperinflation.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    50 views4 pages

    Demand-Pull Inflation & Cost-Push Inflation

    Uploaded by

    Alec Hope Buenaventura
    Cost-push inflation occurs when a key input such as oil increases in price, reducing aggregate supply. Demand-pull inflation happens when aggregate demand increases due to factors like higher foreign GDP or business optimism. Cost-push inflation is more serious as it stems from production costs and is difficult to address with monetary policy alone, potentially leading to hyperinflation.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    DEMAND-PULL INFLATION & COST-PUSH INFLATION

    1. Using appropriate diagrams, explain the difference between the demand-pull inflation and cost-push
    inflation

    A. Demand-pull inflation

    Demand-pull inflation happens when there is an increase in the aggregate demand in the
    economy and output of production cannot contain it. This can be triggered by many factors. It may first
    be triggered by increase in the money supply than the increase in the level of production. This is an
    example of a monetary expansion. Since there is a lot of money, the consumers demand more, pushing
    the aggregate demand to the right. Other factors may be decreases in taxes, increase in investments,
    decrease in savings. These actions constitute increase in income for consumers to spend or “disposable
    income”. Increase in exports and decrease in imports also causes demand-pull inflation as the income
    increases which pushes the population to demand more goods and services.

    B. Cost-push inflation
    Cost-push inflation happens when decreases and causes the increase in price. This is caused by
    shortage of a key resource that affects the level of production such as oil, steel or some other resource.
    Other inputs may be factored in such as labor or capital. When there is a shortage of these inputs, the
    tendency is production output will decrease which causes the supply to shift to the left. Another reason
    of this, is the existence of monopoly in the economy. Monopolies can manipulate prices to further
    maximize profit. The aggregate supply becomes sensitive with the number of outputs produced. This is
    also called the profit-push inflation.

    2. Why is cost-push inflation potentially more serious than demand-pull inflation?

    Cost-push inflation is more serious than demand-pull inflation because cost-push inflation is
    more difficult to be fixed. The problem here is related to the price of production inputs which causes
    prices of goods and services to elevate as well. This is depicted by a fall of the aggregate supply, shifting
    it to the left. Now, this cannot be easily fixed by monetary policy for that only affects the aggregate
    demand. In order to fix this, the government is expected to intervene in terms of establishing an
    administrative control on price rise and income policy in order to also control the inflation. If not, then
    the increase in prices will move upward spiral and will causes further price hikes which may lead to
    hyperinflation.

    3. Using diagrams show the effects on the price level of the following events and explain whether it is
    cost-push or demand-pull inflation.

    A. Real GDP in foreign countries that trade with your country increase

    It will be demand-pull inflation. As the Real GDP in the other country that we trade with
    increases, prices in that country also increases following the economic expansion. Now, since their
    prices are higher, the home country is less likely to import products from them. As a result, our imports
    decrease and causes our Real GDP to increase as well which then shifts the aggregate demand to the
    right, since income is higher. Thus, the demand-pull inflation.
    B. Businesses are optimistic in the future

    When businesses are optimistic, demand-pull inflation happens. When businesses are
    optimistic, investments also increase. This will increase aggregate demand which in turn elevates the
    price levels together with the expansion. Therefore, it is demand-pull inflation.

    C. An increase in housing prices

    If housing prices increases, the wealth of the house owners increases as well. Since the asset’s
    worth increases, the owners will have more confidence to spend, borrow, invest and take risks. This is
    also known as the “wealth effect”. The increase in expenditure and investments will trigger the increase
    in aggregate demand which then elevates price levels. Thus, the demand-pull inflation.
    D. A sudden increase in the price of oil

    This will cause a cost-push inflation. Oil is considered as a salient factor of production in most
    industries. Sudden increase in oil prices leads to the increase in the cost of production. As the
    production cost increases, the number of goods produced will decrease. This will decrease the amount
    of aggregate supply in the economy and elevate prices. Thus, the cost-push inflation.

    4. What component of AD does each event affect?

    A. Real GDP in foreign countries that trade with your country increase

    This event would affect the trade, specifically import part. Since, the home country would less
    likely buy from other country since the prices there is high. Thus, aggregate demand would increase and
    elevate price levels due to the decrease in imports.

    B. Businesses are optimistic in the future

    This event would affect investments. As the business climate becomes better, people tend to
    invest more expecting higher returns. Thus, the increase in the aggregate demand.

    C. An increase in housing prices

    This event would affect mainly consumption. Since wealth effect factors in, people tend to
    spend more since they are more confident due to the safety net given by the increase in value of the
    asset. This also true with their confidence in taking loans and investing.

    D. A sudden increase in the price of oil

    This would affect consumption. Since the price levels are higher, the aggregate demand in
    consuming oil decreases.

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