What is Demand Pull Inflation?

Topics: Inflation, Milton Friedman, Keynesian economics Pages: 2 (452 words) Published: March 12, 2014
In an economy, there are many factors that influence how good a company performs. Demand Pull inflation is one of the many types of Inflations in the economy. According to Investopedia, “Demand Pulling Inflation is a type of inflation is a result of strong consumer demand. When many individuals are trying to purchase the same good, the price will inevitably increase. When this happens across the entire economy for all goods, it is known as demand-pull inflation.” What is it?

Demand Pulling Inflation is a term used in economics in a scenario that occurs when there is a rise in price level because of imbalance demand and supply. This simply means, when the demand outweighs the supply, the price increases. Many Economists feel that Demand Pulling Inflation is an outcome of – “too many dollars chasing too few goods” How does it happen?

When the purchasing power of a common man increases in an Economy, Demand Pulling Inflation occurs. This further leads to an increase in the aggregate demand too. Let’s assume a piece of chocolate is sold at $2, and the average income of an individual is $20,000 per month. Now, because of some economic factors, say there is an increase in wages, and the average salary becomes doubled to $40,000 per month. This results in an aggregate increase in demand for the chocolate that will now be sold at $4 per piece. Effects of DPI

If held at low rates, Inflation affects the growing economy both in a positive and negative way. Let’s understand both the effects below: Pros: Even though inflation is associated with negative aspect, as a whole it does have some positive aspects too. The biggest one being the decrease in unemployment, as the inflation increases. Others being, a drop in real interest rates and increase in the value of assets, which shows positive effect to inflation. Cons: Negative aspects are equally important to know for the effects of inflation. The first one being, the loss of dollar value. When the inflation is at a...
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