Demand‐Pull Inflation

In the AD–AS model, an economy is in equilibrium at the point where the aggregate demand curve, AD, intersects the short-run aggregate supply curve, SRAS. Demand-pull inflation happens when aggregate demand for goods and services in the economy increases.

This increase in aggregate demand pushes prices upward.

Aggregate demand can increase due to higher consumer spending, more business investment, increased government spending, tax cuts, or higher net exports.

When consumers, businesses, or the government spend more money, aggregate demand increases.

One reason for such an increase is higher consumer confidence.

In this situation, households tend to spend more on goods and services because they feel more secure about their jobs and income.

As a result, aggregate demand increases.

With the rightward shift of the aggregate demand curve, the price level rises.

It is called demand-pull inflation because strong aggregate demand causes this type of inflation.

If an economy is already operating close to full capacity, producers cannot easily raise output to meet higher demand. So the price level may rise sharply, making demand-pull inflation worse.