Analyze the theoretical underpinnings of demand-pull inflation and cost-push inflation. Which of the following pairs correctly identifies an initiating factor for each type?

💡 Solution & Explanation

Demand-pull inflation occurs when aggregate demand for goods and services outpaces aggregate supply, often fueled by aggressive monetary expansion or expansionary fiscal measures. Cost-push inflation originates from supply-side shocks, such as abrupt increases in raw material costs, wages, or imported energy prices like crude oil, which compel producers to raise prices to maintain profit margins. Stagflation represents a severe scenario where cost-push pressures occur simultaneously with stagnant economic growth and elevated unemployment. Central banks adjust policy rates to manage demand-pull pressures.