Key terms
- Demand-pull inflation
- Demand-pull inflation is a rise in the price level caused by aggregate demand growing faster than the economy's ability to supply output.
- Cost-push inflation
- Cost-push inflation is a rise in the price level caused by higher input prices, such as oil or labour, across most firms.
Demand-pull inflation comes from spending that output cannot keep up with
If aggregate demand keeps rising when the economy is already close to potential GDP, firms cannot produce much more, because labour and capital are already fully employed. Extra spending then mostly raises prices instead of output. On the AD/AS diagram, AD shifts right into the steep part of the SRAS curve: the price level rises and real GDP rises only a little. Higher inflation has typically come during or just after booms.
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Near capacityAD0 meets SRAS where the curve is already turning steep, at price level P0 and real GDP Y0.