Dear forum experts Just wanted to quickly confirm a few things regarding the order of events with demand-pull and cost push inflation. All I'd like to know is whether this sounds right in terms of explaining these concepts in my own words. With demand pull inflation: * Aggregate demand increases (i.e. a rightward shift in the AD curve) * Firms increase output in response. However, as firms find that they cannot keep up with the demand as they approach maximum capacity utilisation, they also raise prices (i.e. a rightward movement along the AS curve) With cost push inflation: * Production costs (e.g. wages) increase * Firms pass on the costs increase through price increases * Aggregate demand decreases (i.e. a leftward shift in the AD curve) * Firms decrease output in response (i.e. a leftward shift in the AS curve) Appreciate any help!
Hi You're right about demand-pull inflation, ie AD shifts right and there's a movement along the AS curve. Note that the increase in AD won't cause inflation when there is excess capacity because the AS curve is relatively elastic then; it's only a problem when the economy is at or near full capacity when the AS curve is relatively inelastic. This is why it's associated with a boom. With cost-push inflation, costs increase and therefore the AS curve shifts to the left (or upwards by the increase in costs). There is then a movement along the AD curve leftwards as the price level increases and output falls. Hope this helps.