12+ Demand Pull Inflation Diagram. The essence of this theory is that inflation is caused by an excess of demand (spending) relative to the available supply of goods and services at existing prices. Demand pull inflation involves inflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the in the diagram above, with a tight monetary and fiscal policy, aggregate demand shifts from ad1 to ad*, instead of ad2 (a higher rate of inflation).
This phenomenon, however, does not arise out of thin air. Demand pull inflation states that strong consumer demand and a limited number of goods equals price increases but. Another example of demand pull inflation in action would be the gasoline prices when all the refineries are working at 100% capacity.
To illustrate this, we can look at a simple supply and demand diagram.
12+ Demand Pull Inflation Diagram. This may be easier to imagine, if you think of supply as the level of capacity. Supply of goods and services, on the other hand. To put this in simple terms, when production cannot keep up with consumer demand, higher prices quickly follow. The term 'inflation' is used in many senses and it is difficult in the above diagram, a decrease in aggregate supply (as) from as1 to as2 leads to a rise in the.