What is inflation?

3. What is the difference between demand pull inflation and cost push inflation?

• 3. What is the difference between demand pull inflation and cost push inflation? Must the economy experience only one type of inflation at a time or can these occur simultaneously? If you were trying to control inflation, would you depend on fiscal or monetary policy? Why? If you were trying to reduce unemployment, would you depend on fiscal or monetary policy? Why?

• Answer:

  Demand pull inflation is where the demand for an item has increased to a point where the price is increased, to reach an new equilibrium on a supply demand diagram. For example, if there is a toy many children want for christmas, sellers may increase the price. Cost push inflation is where the price must be increased because the costs of making the product or service has increased, for example, if there was a new tax on raw material A, any products which use this raw material will have their price increased relative to the tax increase. These can both occur at the same time, for example, if we look at the scenario of eg coal. Lets imagine there is a large increase in the demand for coal for whatever reason, the companies buying it from the mines are the customers of the mines, and demand pull inflation occurs, the price these companies sell coal at to the customer must be increased due to this demand pull inflation, inciting cost push inflation. I would say it is not a good idea to 'depend' on one of either the monetary or fiscal policy, as it is better to use smaller changes in both to give a larger change in the economy. If I was aiming to reduce unemployment, I wouldnt depend on a particular policy, you would have to look at supply side policies, the current state of the economy, eg recession, etc. I would do this becuase there are many factors to take into account before any change which would influence the economy.