• In terms of the simple production possibilities analysis, demand-pull inflation results when the economy bumps against, and tries to go beyond, the production possibilities frontier. The end result is inflation.


• In the more elaborate aggregate market analysis, demand-pull inflation results when aggregate demand increases beyond aggregate supply creating economy-wide shortages. As with market shortages, the price (or price level) rises. The end result is inflation.

• It could be the result of an increase in consumption, perhaps brought about by a boost in consumer confidence or (strange is it might seem) expectations of future inflation.


• It could be the result of an increase in investment caused by falling interest rates or expectations of a booming economy.


• It could be the result of an increase in government spending or a decrease in taxes, either of which would boost deficit spending.


• It could be an increase in exports to other nations or a decline in imports from other nations.

Suppose, for example, that households decide to increase consumption expenditures because they expect inflation to increase and future prices will be higher. As such, they devote a larger share of their income to consumption and a smaller share to saving. But, if households save less, then the flow of funds used by business for investment expenditures and government for deficit financing is less. These sectors have less money to spend.

An increase in aggregate demand caused by an increase in consumption expenditures can temporarily trigger a higher price level, but eventually it will be countered by decreases in aggregate demand caused by decreases in investment expenditures and government purchases.