32.6. With aggregate demand of D0, the result of the higher money wage rate and the resultant upward shift in SS function from S0S to S1S is a rise in the price level from P0 to P1 and a fall in the output level from Y0 to Y1 (which results in unemployment). The excess demand in the economy develops owing to large-scale investment expenditure either in the public or in the private sector, thereby exceeding the total output. The problem of identifying the basic nature-and fundamental source of inflation continues. Ultimately an excess demand inflation which is not fed by an expanding money supply must come to an end. The soaring price of onions was the result of the group action of onion producers. Before publishing your Articles on this site, please read the following pages: 1. The Figure 32.5 shows that pure-demand-inflation theorists tend to assume that at some income level Y0 in the Figure corresponding to full-employment, the aggregate supply function becomes completely inelastic, as drawn. Keynes supposed investment to be fairly sensitive to the rate of interest. Lerner’s “low full employment” with substantial voluntary unemployment, and the last to his “high full employment” with little or none. This is the celebrated quantity theory, going back at least as far as David Hume in the 18th century. Their basic contentions were that short-period changes of the money supply are, in fact, followed (after a varying interval) by changes in money income and that the velocity of circulation, though it fluctuates to some extent with the money supply, tends to be fairly stable, especially over long periods. The process may be initiated either by demand-pull or by cost-push but it cannot be maintained unless other forces also operate activity. The theory fails to account for the experience in the decades after World War II of continuous inflation in conditions that do not suggest the existence of an inflationary gap. The shortage of products in the market would result in the further increase of prices. Their view is that the general price is determined by the total demand for and total supply of goods just as the price of any good is determined by the forces of demand and supply for it. But at the new equilibrium between the IS and LM functions the level of output is below the full-employment level and, thus, there will be un-cleared markets and pressure on wages and price to return to their former level. Thus, cost-push inflation once set in motion in one industry or sector, spreads like wildfire in the whole economy. Inflation, in economics, collective increases in the supply of money, in money incomes, or in prices. In addition, Prof. Eckstein advocated that concentration of demand for products of bottle industries results in inflation. It looks, then, as if a general wage-price increase will create a situation in which all the higher priced output will not be bought, and this means that cost-push inflation is not likely to be self-sustaining as is sometimes believed. This hike in price levels occurs due to increase in wages (because of trade unions) in the oligopolistic industry. Increase in wage rate has pushed S0S curve to S1S. However, both monetarists and Keynesians reject the idea of administrative type cost-push inflation—in fact monetarists reject all versions of cost-push inflation. At this point, the supply of goods and services cannot be increased further while the demand of products and services increases rapidly. This... 3. On the other hand, structuralists believed that the inflation occurs because of the unbalanced economic system and they used both monetary and fiscal measures together for sorting out economic problems. Fig. Moreover, these policies cannot be applied to oligopolistic rise in prices, which is due to increase in the cost of production. John Maynard Keynes, detail of a watercolour by Gwen Raverat, c. 1908; in the National Portrait Gallery, London. Cost-Push Inflation: Economists like Friedman, Hawtrey, Golden Weiser, who regard inflation as a purely monetary phenomenon, strongly support this theory of inflation caused by excess money supply. According to him, the direct relationship between wages and prices of products is the main cause of inflation. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. In modern income theory, however, demand-pull is interpreted to mean an excess of aggregate money demand relative to the economy’s full employment output level.