Inflation and deflation
Causes of demand-pull inflation
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Demand-pull inflation is caused by higher levels of aggregate demand driving up the general price level of goods and services.
Increases in aggregate demand may result from:
a consumer boom
a rise in government spending
higher business confidence
an increase in investment
an increase in net exports.
Increase in money supply
Monetarists argue that the key cause of higher aggregate demand is increases in the money supply. They suggest that if the money supply grows more rapidly than output, the greater supply of money will drive up the price level.
Imported inflation occurs due to higher import prices, forcing up costs of production and therefore causing domestic inflation.
A cut in interest rates
A cut in interest rates causes a rise in consumer spending and higher investment. This boost to demand causes a rise in aggregate demand and inflationary pressures.