demand pull inflation logic chain

demand-pull inflation (definition)

occurs when there is an increase in aggregate demand that outpaces the economy’s ability to produce goods and services

logic chain one

as AD rises firms respond by increasing production but if the economy is already operating near its full capacity, they may not be able to keep up with the growing demand

logic chain two

this excess demand leads to a rise in factor prices such as wages, which causes a general increase in prices throughout the economy as consumers are willing to pay more to obtain the limited supply of goods and services

logic chain three

the end result is an increase in the general price level