Cost-Push Inflation: Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation or supply shock. Cost-push inflation basically means that prices have been "pushed up" by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation). For example: As in the case of the rise in the price of oil, the auto industry was effected by the inflation within the oil industry. This meant that the prices for automobiles began to increase. In addition, the cost for auto parts began to creep up, which in turn made it necessary for mechanics to charge more for their services in order to cover the increased cost of securing material to repair vehicles.
Demand-pull inflation occurs when there is an increase in aggregate demand, categorized by the four sections of the macroeconomic: households, businesses, governments and foreign buyers. Demand-pull inflation is fueled by income, so efforts to stop it involve reducing consumer's income or giving consumers more incentive to save than to spend. Demand-pull inflation persists if the public or foreign sector reinforces it. Low taxes and profligate government spending exacerbate demand-pull inflation. A failure of the central bank to reign in the money supply also makes the demand-pull inflation worse. Demand-pull inflation can spread across borders as well. China and...