Demand-Pull Inflation

When the demand curve shifts to the right from AD1 to AD2, as illustrated below, notice how the demand moves farther away from the vertical price level axis (the demand curve is “pulling away” from the vertical axis). In this case, the price level increases from 111.4 to 115.2—it is getting pulled higher by the demand curve shifting right. That is why this is called demand-pull inflation. McEachern (2019) points out that government spending during the Vietnam War and expanded social programs during the 1960s resulted in the aggregate demand curve continuously shifting to the right and causing demand-pull inflation.

Cost-Push Inflation

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The aggregate supply curve shifting to the left can also cause what is known as cost-push inflation. In this case, the aggregate supply curve shifts from AS1 to AS2, as shown below. The aggregate supply curve is pushing in toward the vertical price level axis. The price level in the figure below increases from 111.4 to 113.7 (it is getting pushed higher by the aggregate supply curve shifting left). Because prices are being “pushed” higher by the aggregate supply curve, we call this type of inflation cost-push inflation. McEachern (2019) indicates that cost-push inflation occurred between 1973 and 1975 when crops failed in the United States and when OPEC raised oil prices. Both of these events resulted in decreases in aggregate supply.