Demand inflation is that which arises when aggregate demand rises to levels in which the productive supply is not enough to cover it.
When the aggregate demand, that is, the total of goods and services that are demanded in an economy, exceeds the total of goods and services that such economy generates. What is known in economics as excess demand arises. Sooner or later this excess demand will put pressure on prices causing general increases in them. Therefore, if the suppliers of goods and services, that is, companies, fail to increase their production, prices will rise.
Root cause of demand inflation
The identification of the fundamental causes that generate demand inflation can be found in two currents of economic thought. In the Keynesian explanation of inflation and the monetarist explanation of inflation.
Monetarists maintain that when the economy presents an excess of the circulating medium, that is, more money than is necessary in the economy, the population has a greater capacity to demand. Therefore, if the productive apparatus of the economy does not have enough capacity to respond with a greater production of goods and services, by right obligation, generalized increases in the prices of goods and services will be generated.
Whereas, for the Keynesians, increases in price levels were determined by an increase in the elements that make up aggregate demand. That is, when consumption, investment, investment goods and public spending increase, the prices of goods and services experience increases.
So these currents of economic thought identify the factors that cause demand inflation. For Keynesians this is due to excessive increases in aggregate demand. Thus, for monetarists, inflation is generated by an increase in the supply of money above the demand of the economy. We then have that these theories do not coincide in the factors that cause excess demand.Causes of inflation
Economic measures against demand inflation
When economies present inflationary processes of this type, that is, demand inflation. Authorities tend to take action in two directions. attacking monetary variables and attacking variables related to public spending, investment and prices.
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