Cost Push & Open Inflation

Cost Push Inflation

• Inflation may originate from supply side also.

• Aggregate demand remaining unchanged, a fall in aggregate supply due to exogenous cause, may lead to increase in price level.

• In this graph, the starting point is the equilibrium price (Op) and output (Oq).

• If aggregate supply has fallen, the SS curve shifts left ward to S1 S1 .

• At price Op now supply will be Oq2but demand Oq.

• This will push prices high till a new equilibrium is reached at Op1 .

• At the new price there will be no excess demand.

• Inflation is thus a self limiting phenomenon.

Open inflation

• The continuous rise in price level is visible in the naked eye.

• One can see the annual rate of increase in the price level. Repressed inflation

• There is excess demand.

• The excess demand is prevented from increasing price level by some repressive measures.

• The measures taken by the government like price control, rationing etc.

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