in what way does excessive demand cause inflation

It occurs when consumer demand for goods and services increases so much that it outstrips supply. Primary Causes. They are more or less built into Since there are many possible measures of the price level, there are many possible measures of price inflation. For example, with inflation, those segments in society which own physical assets, such as property, stock etc., benefit from the price/value of their holdings going up, when those who seek to acquire them will need to pay more for them. The The inflation rate is most widely calculated by calculating the movement or change in a price index, typically the To illustrate the method of calculation, in January 2007, the U.S. Consumer Price Index was 202.416, and in January 2008 it was 211.080.

This necessarily introduces distortion, and can lead to legitimate disputes about what the true inflation rate is. This has led to a moderation of the The term "inflation" originally referred to a rise in the general price level caused by an imbalance between the quantity of money and trade needs.Conceptually, inflation refers to the general trend of prices, not changes in any specific price. Measuring inflation in an economy requires objective means of differentiating changes in nominal prices on a common set of goods and services, and distinguishing them from those price shifts resulting from changes in value such as volume, quality, or performance. But if supply of factors is inelastic, prices will rise since output cannot be increased appreciably.We may conclude that increase in demand beyond the level of full employment does not lead to an Increase in output and employment. Today, most economists favor a low and steady rate of inflation.Historically, rapid increases in the quantity of money or in the overall Historically, large infusions of gold or silver into an economy also led to inflation. In this view, while generally grounded in monetarism, future expectations and strategies are important for inflation as well. Inflation also seems to act in an asymmetric way, rising more quickly than it falls. There are also other theories about inflation that are no longer accepted by The real bills doctrine asserts that banks should issue their money in exchange for short-term real bills of adequate value. However, the Monetarists believe the most significant factor influencing inflation or deflation is how fast the money supply grows or shrinks. In practice, velocity is not exogenous in the short run, and so the formula does not necessarily imply a stable short-run relationship between the money supply and nominal output. If aggregate demand for rice is, say, 12,000 qtls., this demand will be called an excess demand because aggregate supply at the level of full employment of resources is only 10,000 qtls. New products may be introduced, older products disappear, the quality of existing products may change, and consumer preferences can shift. This theory was important in the 19th century in debates between "Banking" and "Currency" schools of monetary soundness, and in the formation of the The debate between currency, or quantity theory, and the Inflation is the decrease in the purchasing power of a currency. The impact of inflation differs on different sectors of the economy, with some sectors being adversely impacted while others benefitting. Both the sorts of goods and services which are included in the "basket" and the weighted price used in inflation measures will be changed over time to keep pace with the changing marketplace.When looking at inflation, economic institutions may focus only on certain kinds of prices, or Most inflation indices are calculated from weighted averages of selected price changes. The Currently, the quantity theory of money is widely accepted as an accurate model of inflation in the long run. In many countries, employment contracts, pension benefits, and government entitlements (such as Annual escalation clauses in employment contracts can specify retroactive or future percentage increases in worker pay which are not tied to any index. This is known as the theory of A fundamental concept in inflation analysis is the relationship between inflation and unemployment, called the However, one problem with this theory for policy-making purposes is that the exact level of potential output (and of the NAIRU) is generally unknown and tends to change over time. The difference between the two is EB (BM – EM) which is a measure of inflationary gap or excess demand.In short, the inflationary gap is the amount by which the actual aggregate demand exceeds the aggregate demand required to establish full Output and Income employment equilibrium.The main reasons for excess demand are apparently the increase in four components of aggregate demand (see Section 8.4).

Worse, it can change because of policy: for example, high unemployment under British Prime Minister A connection between inflation and unemployment has been drawn since the emergence of large scale unemployment in the 19th century, and connections continue to be drawn today. Increase in demand helps the output and employment to increase without an increase in prices so long as there are unemployed and under-employed resources. However, in the long run, changes in velocity are assumed to be determined by the evolution of the payments mechanism. Hence, any factor that increases aggregate demand can cause inflation.