The process may be initiated either by demand-pull or by cost-push but it cannot be maintained unless other forces also operate activity. Let us know if you have suggestions to improve this article (requires login). Apart from government outlays, the main constituent of this nonconsumption expenditure is private investment. For example, in the past few years, the prices of onion were very- high in India. The supporters of structural theories believed that the inflation arises due to structural maladjustments in the county or some of the institutional features of business environment. Since inflation is due to excess demand, it is considered controllable by the demand reducing monetary and fiscal policies. Inflation, in economics, collective increases in the supply of money, in money incomes, or in prices. The market power theory of inflation represents one extreme end of inflation. Disclaimer Copyright, Share Your Knowledge Inflation, in economics, collective increases in the supply of money, in money incomes, or in prices. The chief importance of the Keynesian approach and various elaborations of it is that they provide a framework in which governments can endeavour to manage the level of activity in the economy by varying their own expenditures and receipts or by influencing the level of private investment. Demand-pull inflation refers to the inflation that occurs due to excess of aggregate demand, which further results in the increases in price level. This results in fall in supply at increased level of prices as to compensate the increase in wages with the prices of products. The Demand-Pull Inflation: In such a situation, people in middle and low income groups reduced the consumption of onions. The key to it is the assumption that consumers tend to spend a fixed proportion of any increases they receive in their incomes. The rise in wages and costs leading to rise in prices (wage-price spiral) will come to an end. The history of inflation theory can be traced back to the period where the classical theorists sought the cause of inflation through the quantity theory of money. According to them, the general price level rises due to the proportionate increase in the supply of money, output remaining the same. At this point, the supply of goods and services cannot be increased further while the demand of products and services increases rapidly. On the other end, the conventional demand-pull theorists believed that the only cause of inflation is the excess of aggregate demand over aggregate supply. Monetary policy can reduce the rate of inflation by raising the interest rate and regulating the credit flow in the market. The uncertainty and weakness of the relation between interest rates and private investment are another source of difficulty. Under it as the inflation increases, the real income of labour is protected by equivalent wage increases. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. Thus, we find that according to this theory of demand-pull inflation, prices rise in response to an excess of aggregate demand over existing supply of goods and services caused by an increase in the quantity of money—resulting in a fall of interest rates—increasing investment expenditures and prices. But at the new equilibrium between the IS and LM functions the level of output is below the full-employment level and, thus, there will be un-cleared markets and pressure on wages and price to return to their former level. The correlations observed by this so-called Chicago school between money supply and money income are attributed by their critics to variations in the demand for money to spend, which elicit partial responses from supply and are followed after an interval by corresponding changes in money income. In modern income theory, however, demand-pull is interpreted to mean an excess of aggregate money demand relative to the economy’s full employment output level. On the other the goods are sold to businesses instead of customers, then the cost of production increases. The theory assumes that prices for goods and services as well as for economic resources are responsive to supply and demand forces, and will, thus, moves readily upward under the pressure of a high level of aggregate demand.