The difference between these two types of inflation is found in their causes. Both have the same effects (increasing price level), but they are caused by different things. Demand-pull inflation is caused by excess demand. When the people as a whole get more money they are able to pay more for goods and services (unless more goods and services are produced). Economists talk about more money \"chasing\" the same amount of goods and services. This causes shortages and prices rise. Cost-push inflation is caused by disruptions in supply. These disruptions cause increases in the price of production. That leads to inflation. For example, a rise in the price of oil causes practically all production to become more expensive. There is no technical way to determine for sure which kind of inflation is going on. Analysts must simply look around to try to see if the money supply is increasing or if there are supply shocks. Then they have to make informed guesses about why the inflation is happening. Why Savings equals Investment: Using the GDP equation to explain saving and investing: Begin with our GDP equation for an open economy: Y = C + I + G + NX To simplify this idea, let’s look at a closed economy, where there are no imports or exports. This means that NX will equal 0 and will therefore drop out. This leaves us with: Y = C + I + G We can rearrange this equation to solve for investment (I) as a function of the other variables in the economy: I = Y – C – G This equation tells us that investment in the economy will be equal to the total amount produced (GDP = Y) minus consumption spending, and government purchases. Now we can create a savings for the economy equation. The total amount of private savings (savings by the private sector meaning households and firms) is going to be equal to the amount produced (Y) plus transfer payments from the government (we will call this TR, and include things like unemployment, social security and welfare) minus the amount spend on consumption (C) and taxes (T). S(private) = Y + TR – C – T Hopefully this makes sense, the amount you save (S) will be whatever is left over (starting from initial money of Y and TR) after you account for spending and expenses (C and T). Now we need to consider public savings, which is how much the government saves. Public spending depends on the amount of taxes they receive (T), the amount they spend in purchases (G), and the amount they transfer to the population (TR). The public savings function will be: S(public) = T – G – TR We can find the total amount of savings (S) occurring in the economy by adding public savings to private savings. S(public) + S(private) = S T – G – TR + Y + TR – C – T =S Note that T and TR cancel out. This leaves us with savings (S) being equal to GDP (Y), government purchases (G), and consumption (C): S = Y – G – C If we plug in the GDP equation for Y, or substitute C + I + G for Y we get: S = C + I + G – G – C Note that C and G will cancel out leaving us with: .

1. The difference between these two types of inflation is found in their causes. Both have the same
effects (increasing price level), but they are caused by different things.
Demand-pull inflation is caused by excess demand. When the people as a whole get more money
they are able to pay more for goods and services (unless more goods and services are produced).
Economists talk about more money "chasing" the same amount of goods and services. This
causes shortages and prices rise.
Cost-push inflation is caused by disruptions in supply. These disruptions cause increases in the
price of production. That leads to inflation. For example, a rise in the price of oil causes
practically all production to become more expensive.
There is no technical way to determine for sure which kind of inflation is going on. Analysts
must simply look around to try to see if the money supply is increasing or if there are supply
shocks. Then they have to make informed guesses about why the inflation is happening.
Why Savings equals Investment:
Using the GDP equation to explain saving and investing:
Begin with our GDP equation for an open economy:
Y = C + I + G + NX
To simplify this idea, let’s look at a closed economy, where there are no imports or exports. This
means that NX will equal 0 and will therefore drop out. This leaves us with:
Y = C + I + G
We can rearrange this equation to solve for investment (I) as a function of the other variables in
the economy:
I = Y – C – G
This equation tells us that investment in the economy will be equal to the total amount produced
(GDP = Y) minus consumption spending, and government purchases.
Now we can create a savings for the economy equation. The total amount of private savings
(savings by the private sector meaning households and firms) is going to be equal to the amount
produced (Y) plus transfer payments from the government (we will call this TR, and include
things like unemployment, social security and welfare) minus the amount spend on consumption
(C) and taxes (T).
S(private) = Y + TR – C – T
Hopefully this makes sense, the amount you save (S) will be whatever is left over (starting from
initial money of Y and TR) after you account for spending and expenses (C and T).
Now we need to consider public savings, which is how much the government saves. Public
spending depends on the amount of taxes they receive (T), the amount they spend in purchases
(G), and the amount they transfer to the population (TR). The public savings function will be:

2. S(public) = T – G – TR
We can find the total amount of savings (S) occurring in the economy by adding public savings
to private savings.
S(public) + S(private) = S
T – G – TR + Y + TR – C – T =S
Note that T and TR cancel out. This leaves us with savings (S) being equal to GDP (Y),
government purchases (G), and consumption (C):
S = Y – G – C
If we plug in the GDP equation for Y, or substitute C + I + G for Y we get:
S = C + I + G – G – C
Note that C and G will cancel out leaving us with:
S = I
This shows that the total amount of savings occurring in the economy is equal to the amount
being invested. Remember that investment leads to the accumulation of capital which leads to
increased labor productivity which leads to economic growth (which is a good thing). So having
high amounts of savings is good for economic growth.
Note that it is possible to have negative amounts of saving or dissaving. For example, if T is less
than G + TR then public saving will be negative. Also, is C + T is greater than Y + TR then we
will also have negative private saving, but this is very rare.
Solution
The difference between these two types of inflation is found in their causes. Both have the same
effects (increasing price level), but they are caused by different things.
Demand-pull inflation is caused by excess demand. When the people as a whole get more money
they are able to pay more for goods and services (unless more goods and services are produced).
Economists talk about more money "chasing" the same amount of goods and services. This
causes shortages and prices rise.
Cost-push inflation is caused by disruptions in supply. These disruptions cause increases in the
price of production. That leads to inflation. For example, a rise in the price of oil causes
practically all production to become more expensive.
There is no technical way to determine for sure which kind of inflation is going on. Analysts
must simply look around to try to see if the money supply is increasing or if there are supply
shocks. Then they have to make informed guesses about why the inflation is happening.
Why Savings equals Investment:
Using the GDP equation to explain saving and investing:

3. Begin with our GDP equation for an open economy:
Y = C + I + G + NX
To simplify this idea, let’s look at a closed economy, where there are no imports or exports. This
means that NX will equal 0 and will therefore drop out. This leaves us with:
Y = C + I + G
We can rearrange this equation to solve for investment (I) as a function of the other variables in
the economy:
I = Y – C – G
This equation tells us that investment in the economy will be equal to the total amount produced
(GDP = Y) minus consumption spending, and government purchases.
Now we can create a savings for the economy equation. The total amount of private savings
(savings by the private sector meaning households and firms) is going to be equal to the amount
produced (Y) plus transfer payments from the government (we will call this TR, and include
things like unemployment, social security and welfare) minus the amount spend on consumption
(C) and taxes (T).
S(private) = Y + TR – C – T
Hopefully this makes sense, the amount you save (S) will be whatever is left over (starting from
initial money of Y and TR) after you account for spending and expenses (C and T).
Now we need to consider public savings, which is how much the government saves. Public
spending depends on the amount of taxes they receive (T), the amount they spend in purchases
(G), and the amount they transfer to the population (TR). The public savings function will be:
S(public) = T – G – TR
We can find the total amount of savings (S) occurring in the economy by adding public savings
to private savings.
S(public) + S(private) = S
T – G – TR + Y + TR – C – T =S
Note that T and TR cancel out. This leaves us with savings (S) being equal to GDP (Y),
government purchases (G), and consumption (C):
S = Y – G – C
If we plug in the GDP equation for Y, or substitute C + I + G for Y we get:
S = C + I + G – G – C
Note that C and G will cancel out leaving us with:
S = I
This shows that the total amount of savings occurring in the economy is equal to the amount
being invested. Remember that investment leads to the accumulation of capital which leads to
increased labor productivity which leads to economic growth (which is a good thing). So having

4. high amounts of savings is good for economic growth.
Note that it is possible to have negative amounts of saving or dissaving. For example, if T is less
than G + TR then public saving will be negative. Also, is C + T is greater than Y + TR then we
will also have negative private saving, but this is very rare.