Explain the difference between demand pull inflation and cost-push inflation, illustrating your...

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Explain the difference between demand pull inflation and cost-push inflation, illustrating your answer with examples of each. Then assess which of the two are most likely to be a problem in Australia under the economic circumstances we are likely to experience in the coming few years XXXXXXXXXXwords plus diagrams

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Explain the difference between demand pull inflation and cost-push inflation, illustrating your answer with examples of each. Then assess which of the two are most likely to be a problem in Australia under the economic circumstances we are likely to experience in the coming few years. 500-1000 words plus diagrams
Ina very basic sense, inflation occurs (or prices rise) when there is some imbalance between demand and supply of a good. If demand rises continuously in a manner that supply is unable to keep up with it we have a price rise.  On the other end, if supply falls and there is no letup in demand then we are left with arising price level. The imbalance between demand and supply is the principal cause of inflation. Inflation can therefore be referred to as a general and persistent rise in the price level, often measured by the CPI (consumer price index).
. The Keynesian economics was the first to recognise that prices can rise consistently due to two main factors:
· Demand factors that pull up demand, causing demand pull inflation
· Supply factors that reduce supply causing cost push inflation.
     These can be understood clearly through the AD-AS diagram. The AS is shown as upward sloping initially, and becomes vertical at the full employment level. This shows that in the short run supply rises with a rise in prices – SRAS is positive sloping. Over the long run aggregate supply is determined by the resources available and it is vertical (LRAS); it does not respond to any rise in price.

Explain the difference between demand pull inflation and cost-push inflation, illustrating your answer with examples of each. Then assess which of the two are most likely to be a problem in Australia...

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