What is Demand Inflation?

Demand-driven inflation, also called excess demand inflation, refers to the continuous and significant increase in the general price level caused by aggregate demand exceeding aggregate supply. Generally speaking, an increase in aggregate demand will cause an increase in the price level and an increase in total production. However, when full employment is reached, that is, after reaching the limit of actual output, any increase in aggregate demand will cause price levels Further increase, that is, inflation is more obvious. This inflation is considered "too many currencies chasing too few commodities."

Demand drives inflation

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Demand-driven inflation

(1) In AS

When output is below the level of full employment, increasing demand leads to two possible outcomes:

(1) The output has increased but the price level has not changed. Due to the bottleneck phenomenon, an increase in effective demand caused an increase in output, and at the same time caused a rise in prices, which caused semi-inflation.

(2) When the output reaches full employment, due to the restriction of production capacity, the increase in aggregate demand will no longer cause an increase in output, but only the price level will increase by the same proportion, and real inflation will occur.