Demand Pull Inflation : Economic Issue Essay

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Demand-Pull Inflation:
One of the most prominent causes of this economic issue is demand-pull inflation, which involves an increase in aggregate demand or consumer expenditure, whilst the economy is simultaneously nearing its supply capacity. Consequently, as output is unable to expand to meet demand in the short term, prices will rise, as evidenced in Figure 2, conveying the Demand-Pull Inflation diagram, where the aggregate demand curve shifts to the right, leading to an increase in price levels from P1 to P2.

Inflationary expectations:
Individuals in the economy will expect higher inflation in the future, they may act that will cause an increase in inflation. If the prices of goods and services are expected to increase, consumers will attempt to purchase products before prices increase, whilst employees expect inflation to increase, they will demand an increase in their wages to retain purchasing power.

Imported inflation:
Inflation is transferred to Australia through international transactions. Increases in the price of imported goods will tend to increase inflation in the same way as it would an increase in the price of domestically produced goods. A depreciation of the Australian dollar will increase the domestic price of imports which will lead to consumers paying a higher amount for imports will depend on market conditions. Effects of Inflation
Inflation has substantial impacts on the economy in short and long term. The higher the level of inflation the more…

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