Prices go up or down based on how much people want something and how much of it is available. When more people want something, or there’s not enough of it, the price goes up. So, there are two main types of inflation—demand-pull inflation and cost-push inflation.
- Demand-pull Inflation: This happens when a lot of people want something, and it makes the price go up.
- Cost-push Inflation: This occurs when there’s not enough of something, so the cost to get it goes up, and that makes the price go up too.
8.3.1 Demand-pull Inflation
Demand-pull inflation happens when a lot of people want things more than what’s available. If demand keeps growing, but the supply doesn’t catch up, prices go up. This usually occurs when everyone is already working, and there’s no room for more production.
The main reasons for demand-pull inflation are:
- Black Money Growth: When there’s more unaccounted money, people buy more things, increasing demand.
- Population Increase: If there are more people, there are more consumers. This makes more demand for goods.
- More Money in Circulation: When the government puts more money into the system, people have more to spend, and that raises the demand for goods.
- People Having More Money: When regular folks have extra money, they buy more things, increasing demand.
- Government Spending More: When the government spends more money, it boosts demand for goods.
Demand-pull inflation can be graphically illustrated as in Fig. 8.1.
Fig. 8.1 Demand-pull Inflation
where,
SS = Aggregate supply curve which rises initially when the resources are not fully employed. It becomes vertical at full employment level of output Yf.
DD, 0,01, D2D2 = These are aggregate demand curves. Increase in demand is shown by rightward shift of DD curve to D,D, curve and then to D2D2 curve.OP, OP1, OP2 = These are equilibrium prices, given by intersection of demand and supply curves. Price rises from OP to OPv and then to OP2. This rise in price shows demand-pull inflation.
Objective Type Questions
1.What is the main cause of Demand-pull Inflation?
a) Decrease in population
b) Insufficient money in circulation
c) More people wanting goods than what’s available
d) Decreased government spending
Answer: c) More people wanting goods than what’s available
2.When does Cost-push Inflation occur?
a) When there’s an excess supply of goods
b) When the cost to obtain something increases, leading to a rise in price
c) When there’s a decrease in demand for goods
d) When the government reduces spending
Answer: b) When the cost to obtain something increases, leading to a rise in price
3.What is one of the reasons for Demand-pull Inflation according to the passage?
a) A decrease in the population
b) Black money growth, leading to increased demand
c) A decrease in government spending
d) A reduction in the money supply
Answer: b) Black money growth, leading to increased demand
4.According to the passage, when does Demand-pull Inflation usually occur?
a) When there’s room for more production
b) When there’s a decrease in population
c) When demand keeps growing, but supply doesn’t catch up
d) When there’s a decrease in the money supply
Answer: c) When demand keeps growing, but supply doesn’t catch up
5.What does Cost-push Inflation result from?
a) An increase in demand for goods
b) A decrease in the cost of production
c) Insufficient money in circulation
d) An increase in the cost to obtain something
Answer: d) An increase in the cost to obtain something
6.How does Black Money Growth contribute to Demand-pull Inflation?
a) It decreases demand for goods
b) It leads to a decrease in population
c) It increases unaccounted money, leading to increased demand for goods
d) It has no impact on inflation
Answer: c) It increases unaccounted money, leading to increased demand for goods
7.What is a characteristic of Cost-push Inflation?
a) Excess supply of goods
b) Decreased production costs
c) A decrease in the cost to obtain something
d) Increase in the cost to obtain something
Answer: d) Increase in the cost to obtain something
8.What happens when there’s more money in circulation, according to the passage?
a) Decreased demand for goods
b) Lower prices of goods
c) People have more to spend, raising the demand for goods
d) A reduction in the population
Answer: c) People have more to spend, raising the demand for goods
9.When does Cost-push Inflation typically occur?
a) When there’s a decrease in the cost of production
b) When there’s an excess supply of goods
c) When the cost to obtain something decreases
d) When there’s not enough of something, leading to an increase in costs
Answer: d) When there’s not enough of something, leading to an increase in costs
10.What role does government spending play in Demand-pull Inflation?
a) It decreases demand for goods
b) It has no impact on inflation
c) It boosts demand for goods
d) It leads to a decrease in population
Answer: c) It boosts demand for goods