Types of Inflation and Deflation – Demand Pull, Cost Push, Benign, and MalignSL
MacroeconomicsThis four-panel diagram compares two types of inflation and two types of deflation using the AD and SRAS model. Demand-pull inflation is caused by an increase in aggregate demand. Cost-push inflation is caused by a decrease in short-run aggregate supply. Benign deflation occurs when short-run aggregate supply increases, lowering the price level while raising real output. Malign deflation occurs when aggregate demand falls, lowering the price level while reducing real output. Each panel shows how changes in AD or SRAS affect the price level and real GDP.
Curves and elements
- aggregate demand
- AD: Aggregate demand shows total spending on domestic output at different price levels. Shifts right increase the price level and real GDP. Shifts left reduce the price level and real GDP.
- short run aggregate supply
- SRAS: Short-run aggregate supply shows real output produced at different price levels. Shifts right lower the price level and raise real GDP. Shifts left raise the price level and reduce real GDP.
Key explanations
- 1
Demand-pull inflation happens when aggregate demand increases from AD1 to AD2, causing the price level to rise and real GDP to increase. Potential cause: increased consumer spending due to lower interest rates.
- 2
Cost-push inflation happens when short-run aggregate supply decreases from SRAS1 to SRAS2, causing the price level to rise while real GDP falls. Potential cause: a rise in oil or energy prices that increases production costs.
- 3
Benign deflation happens when short-run aggregate supply increases from SRAS1 to SRAS2, causing the price level to fall while real GDP rises. Potential cause: productivity growth from improved technology.
- 4
Malign deflation happens when aggregate demand decreases from AD1 to AD2, causing the price level to fall while real GDP falls. Potential cause: a fall in consumer confidence leading to lower consumption and investment.
Example exam question
Using the diagrams, explain why cost-push inflation and malign deflation are likely to reduce real output.
Show example answer
Cost-push inflation reduces real output because SRAS shifts left due to higher production costs, raising the price level while lowering real GDP. Malign deflation reduces real output because AD shifts left due to weaker spending in the economy, lowering both the price level and real GDP. In both cases, output falls because the economy experiences either reduced supply capacity in the short run or reduced total demand.
