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Demand inflation. Demand Inflation. Demand inflation: the situation in which rises in the general price level are caused by excess spending or demand pressures. Generally, demand increases beyond the level of production available in the short term, putting pressure on prices to rise .

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demand inflation1
Demand Inflation
  • Demand inflation: the situation in which rises in the general price level are caused by excess spending or demand pressures. Generally, demand increases beyond the level of production available in the short term, putting pressure on prices to rise.
  • Demand Inflation can be fuelled by any of the 5 sectors of the Aggregate Demand Model, Households (C), Business (I), Governmentconsumption (G1), Government Investment (G2) and the Overseas Market (X-M).
demand inflation2
Demand Inflation
  • Demand Inflation is generally caused by demand outstripping supply.
    • Because supply takes time to adjust, it is difficult for suppliers to meet demand, so prices rise.
    • The economy is operating at the edge of the production possibility frontier. As a result the combination of land , labour and capital is at its maximum, It is difficult to increase production in the short term so prices rise rapidly.

Economy operating

at its maximum.

demand inflation3
Demand Inflation
  • Aggregate demand factors causing demand inflation
    • Increased disposable income
    • Increased consumer and business confidence
    • Increased overseas economic growth
    • Increased government spending
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