Demand-Pull Inflation

When demand for a particular product outweighs its supply, the price of that product usually goes up. Duh. But what happens when strong consumer demand for all sorts of products in a given economy (also known as aggregate demand...use that term to impress the cute economist at your next party) causes prices to rise on such a scale that money drops in value (inflation)?

That's demand-pull inflation.

Demand-pull inflation is actually the most common cause of inflation. It's not always a bad thing—in fact, it can be a sign of a healthy, growing economy. For example, if employment levels rise, people will feel more confident in the economy and spend more money on stuff. The growing demand for everything from new houses to cars to TV sets to socks can lead to demand-pull inflation.

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