... exceeds supply, firms are liable to increase price (as all firms wish to maximise profit), this has no effect on the demand they actually sell as there are excess numbers of people who wish to buy the product. The inflation rate largely depends on the economies output and the closer the AD curve is to full employment/potential output, the larger the increase in the inflation rate. According to Keynes, in the long run, an increase in demand (causing an increase in output) has no effect in the price level as it is perfectly elastic however in the short run aggregate supply curve is not perfectly elastic, an increase in the price levels The main cause of demand-pull inflation (on a sudden increase in demand) can be low exchange rates (decreases price of exports), lower taxes (leads to more disposable income), low interest rates (more people borrow) and increase in consumer confidence. The ...

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