demand-pull inflation

(noun)

A rise in the price level for goods and services in an economy due to greater demand than the economy's ability to produce those goods and services.

Related Terms

  • cost-push inflation
  • inflation

Examples of demand-pull inflation in the following topics:

  • Introduction to Inflation

    • Inflation is a persistent increase in the general price level, and has three varieties: demand-pull, cost-push, and built-in.
    • Demand-pull inflation is inflation that occurs when total demand for goods and services exceeds the economy's capacity to produce those goods.
    • Put another way, there is "too much money chasing too few goods. " Typically, demand-pull inflation occurs when unemployment is low or falling.
    • Unlike demand-pull inflation, cost-push inflation is not "too much money chasing too few goods," but rather, a decrease in the supply of goods, which raises prices .
    • Demand-pull inflation is caused by an increase in aggregate demand.
  • The Relationship Between the Phillips Curve and AD-AD

    • If unemployment is high, inflation will be low; if unemployment is low, inflation will be high.
    • The Phillips curve is the relationship between inflation, which affects the price level aspect of aggregate demand, and unemployment, which is dependent on the real output portion of aggregate demand.
    • As aggregate demand increases, unemployment decreases as more workers are hired, real GDP output increases, and the price level increases; this situation describes a demand-pull inflation scenario.
    • Moreover, the price level increases, leading to increases in inflation.
    • At the initial equilibrium point A in the aggregate demand and supply graph, there is a corresponding inflation rate and unemployment rate represented by point A in the Phillips curve graph.
  • The Short-Run Phillips Curve

    • As unemployment rates increase, inflation decreases; as unemployment rates decrease, inflation increases.
    • When the unemployment rate is 2%, the corresponding inflation rate is 10%.
    • As unemployment decreases to 1%, the inflation rate increases to 15%.
    • Given a stationary aggregate supply curve, increases in aggregate demand create increases in real output.
    • With more people employed in the workforce, spending within the economy increases, and demand-pull inflation occurs, raising price levels.
  • How Fiscal Policy Relates to the AD-AS Model

    • These actions lead to an increase or decrease in aggregate demand, which is reflected in the shift of the aggregate demand (AD) curve to the right or left respectively .
    • Changes in any of these components will cause the aggregate demand curve to shift.
    • It boosts aggregate demand, which in turn increases output and employment in the economy.
    • Since government spending is one of the components of aggregate demand, an increase in government spending will shift the demand curve to the right.
    • A contractionary fiscal policy is implemented when there is demand-pull inflation.
  • Arguments For and Against Inflation Targeting Policy Interventions

    • When inflation falls below this range, the Fed would lower interest rates and raising the money supply in order to push inflation up.
    • Proponents of inflation targeting argue that a volatile inflation rate has negative effects for an economy.
    • This increase in demand leads to higher prices, causing more inflation.
    • This decrease in demand causes producers to sell their goods at lower prices, and the cycle continues.
    • Argue that central banks should maintain inflation targets, Argue that central banks should not maintain inflation targets
  • Push and Pull Strategies

    • A pull strategy stimulates demand and motivates customers to actively seek out a specific product.
    • A strong and visible brand is needed to ensure the success of a pull strategy.
    • Using these strategies will create a demand for the product.
    • With that demand, retailers will be encouraged to seek out the product and stock it on their shelves.
    • Merchants must adapt their strategies to pull in demand, rather than push products--in this case, music--to consumers.
  • Relationship Between Expectations and Inflation

    • To do so, it engages in expansionary economic activities and increases aggregate demand.
    • As aggregate demand increases, inflation increases.
    • They will be able to anticipate increases in aggregate demand and the accompanying increases in inflation.
    • As such, they will raise their nominal wage demands to match the forecasted inflation, and they will not have an adjustment period when their real wages are lower than their nominal wages.
    • The transition at point B does not exist as workers are able to anticipate increased inflation and adjust their wage demands accordingly.
  • The Long-Run Phillips Curve

    • In the long run, inflation and unemployment are unrelated.
    • When unemployment is above the natural rate, inflation will decelerate.
    • If the government decides to pursue expansionary economic policies, inflation will increase as aggregate demand shifts to the right.
    • As aggregate demand increases, more workers will be hired by firms in order to produce more output to meet rising demand, and unemployment will decrease.
    • According to the theory, the simultaneously high rates of unemployment and inflation could be explained because workers changed their inflation expectations, shifting the short-run Phillips curve, and increasing the prevailing rate of inflation in the economy.
  • The Fisher Effect

    • We did not adjust the nominal interest rates for inflation.
    • Unfortunately, inflation can have a significant influence on the financial markets.
    • Investors know the inflation would erode the value from their investment while businesses could repay the bonds with inflated dollars.
    • Consequently, the demand for bonds shifts toward the left while the supply for bonds shifts rightward.
    • You prove this by shifting the demand and supply curve enough, so the quantity does not change.
  • Promotional Strategies

    • Wal-Mart is an example of a company that uses the push vs. pull strategy.
    • In the first case information is just "pushed" toward the buyer, while in the second case it is possible for the buyer to demand the needed information according to their requirements.
    • In markets the consumers usually "pull" the goods or information they demand for their needs, while the offerers or suppliers "pushes" them toward the consumers.
    • In the first case information is just "pushed" toward the buyer, while in the second case it is possible for the buyer to demand the needed information according to their requirements.
    • Pull strategy In a marketing "pull" system, the consumer requests the product and "pulls" it through the delivery channel.
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