Answer: Demand-pull inflation starts from an initial increase in aggregate demand. But if this increase is a one-time only event, the result is a higher price level but not inflation. For inflation to occur, aggregate demand needs to continue to increase. Continuing increases in the quantity of money result in continuing increases in aggregate demand, so monetary growth is necessary for a demand-pull inflation.
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ReplyDeleteDemand-pull inflation starts from an initial increase in aggregate demand. But if this increase is a one-time only event, the result is a higher price level but not inflation. For inflation to occur, aggregate demand needs to continue to increase. Continuing increases in the quantity of money result in continuing increases in aggregate demand, so monetary growth is necessary for a demand-pull inflation.