Inflation can result from excess demand from "summary" of The General Theory of Employment, Interest, and Money by John Maynard Keynes
When goods and services are in high demand, producers may not be able to keep up with the level of consumption. As a result, they may increase prices to balance the excess demand and limited supply. This increase in prices is what we refer to as inflation. Inflation can therefore be seen as a consequence of excessive demand in the economy.
Excess demand can come from various sources. It may be due to an increase in consumer confidence, leading to higher spending levels. It could also be a result of government policies that stimulate demand through increased public spending or tax cuts. Additionally, excess demand can arise from external factors such as a rise in exports or foreign investment inflows.
When demand exceeds supply, it puts pressure on prices to rise. Producers may raise prices in response to the higher demand, leading to an increase in the overall price level in the economy. This increase in prices erodes the purchasing power of consumers, as they need to spend more to buy the same goods and services. As a result, inflation can have negative effects on the economy, such as reducing consumer spending power and eroding savings.
Inflation resulting from excess demand can also lead to a wage-price spiral. As prices rise due to increased demand, workers may demand higher wages to maintain their standard of living. This increase in wages can then lead to further price increases, creating a cycle of rising prices and wages. This can ultimately fuel inflation further, creating a self-reinforcing loop of price increases and wage demands.
It is important for policymakers to be aware of the relationship between excess demand and inflation. By monitoring demand levels and implementing appropriate policies to manage demand, policymakers can help to prevent excessive inflation in the economy. This may involve measures such as increasing interest rates to curb spending or implementing fiscal policies to reduce demand pressures. By understanding the causes of inflation resulting from excess demand, policymakers can take proactive steps to maintain price stability and sustainable economic growth.
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