Inflation And Pull Inflation

Satisfactory Essays
Inflation is the increase in overall price level. There are two main type causes of inflation which is demand- pull inflation and also cost- pull inflation. Demand- pull inflation is caused by the persistent rise in aggregate demand. When aggregate demand is higher than the economy`s ability supply, overall price level in the market will rise. Therefore, inflation occurs. When overall price level rose, consumers will start to plan to purchase more goods before the price rise even higher. Almost every consumer will purchase commodities in order to prevent buying the same product with a higher price in future. This will worsen the demand- pull inflation where the aggregate demand is more than the aggregate supply. Besides, if the government…show more content…
Because when demand- pull inflation is in the long run, the whole country`s economy will fall into a very serious crisis and this might causes the country to fall. Inflation happened is usually due to the inflexible of goods price and wages. If the wages and prices are always in control and flexible, consumers will have a better insight of the future price expectations for all goods and services. Hence, when there is an inflation, consumers will not lift up their guard and buy goods in large quantity. Shortage of supply can be avoided to a lower level. Hence, the demand- pull inflation can be controlled and always in short term run…show more content…
Thus, the curve shift to the left in aggregate supply, the price will increase and quantity reduce. There are many factors which can cause the cost push inflation occur. The first factor that cause the cost push inflation is rising wages. This is because wages are the most significant cost for many firms. It also indicates that the highest wages may contribute to an overall rise of costs for all firms. Secondly, import prices also cause the cost push inflation. When our value of money is devaluated, then the import prices from other country like United Kingdom, United State of America, Australia and New Zealand will become more expensive which will then further lead to an increase in inflation. Our country citizens have to pay more in order to buy the imported goods. Thirdly, the prices of raw material also will influenced the inflation. For example, if the key inputs such as increase in the price oil, producers have to adjust the output supply or increase the price of the outputs in the market in order to overcome and cope with the rising price oil. When output decline and the price of the output rise, the cost push inflation occurs. Moreover, if the firms become less productive, it allows costs to rise and invariably leads to higher prices. This is because firm used a lot of time to produce the products. It wastes time and money because the firms need to pay the wages for
Get Access