Answer:
Demand pull inflation occurs when aggregate demand increases until equilibrium output exceeds the full employment level. For instance this can be caused by an increase in consumer spending. Temporarily both aggregate output and the aggregate price level increase as resources are beyond capacity. Eventually the economy returns to long-run equilibrium when short-run aggregate supply decreases until it and aggregate demand intersect at the same point on the long run aggregate supply curve. Finally, aggregate output returns to its full employment level and the aggregate price level again increases.
1. aggregate demand
2. consumer spending
3. the aggregate price level
4. short-run aggregate supply
5. long-run aggregate supply
6. aggregate output
7. the aggregate price level
Step-by-step explanation:
Demand–pull inflation is caused by an increase in aggregate demand that results in an equilibrium aggregate output that is beyond an economy's full employment level of aggregate output. This can be caused by any substantial increase in the components of aggregate demand, including consumption, business investment, government spending, or net exports.
Initially, the economy will reach an equilibrium in which the new AD curve intersects the upward‑sloping short‑run aggregate supply curve. In this question, both the equilibrium aggregate output and the price level increase beyond the full employment equilibrium levels.
However, the increase in production is not sustainable in the long run. Rising prices and falling unemployment can lead to increases in the wages firms must pay, which causes the short‑run aggregate supply curve to shift to the left. Eventually, the economy will arrive at the equilibrium point where the new AD curve intersects the long run aggregate supply curve and the new short‑run aggregate supply curve at the same point.
Aggregate output returns to the economy's full employment level, and the aggregate price level increases further.