Contrast demand-pull inflation with cost-push inflation.

What will be an ideal response?

Demand-pull inflation occurs when an increase in aggregate demand (i.e., a rightward shift in the aggregate demand curve) raises the price level and increases actual real output beyond the economy’s potential output. During this temporary inflationary gap, unemployment is below the natural rate of unemployment. Cost-push inflation occurs when a negative supply shock causes a leftward shift in the short-run aggregate supply curve. The price level rises even though the aggregate demand curve does not shift. Actual real output falls below the economy’s potential output. This condition of lower growth and higher prices occurring together is called stagflation. During the temporary recessionary gap, unemployment is above the natural rate of unemployment.