Explain the concept of demand-pull inflation in aggregate demand and supply.

Demand-pull inflation refers to a situation in which the overall price level in an economy rises due to an increase in aggregate demand. This occurs when the total demand for goods and services exceeds the economy's ability to supply them.

In the context of aggregate demand and supply, demand-pull inflation can be explained as follows:

1. Increase in Aggregate Demand: Demand-pull inflation occurs when there is an increase in aggregate demand, which is the total demand for goods and services in an economy. This increase can be caused by various factors such as an expansionary fiscal policy, increased consumer spending, or higher investment levels.

2. Excess Demand: When aggregate demand rises, it creates excess demand in the economy. This means that the quantity of goods and services demanded exceeds the quantity that can be supplied at the current price level.

3. Price Increase: In response to excess demand, producers and sellers in the economy start raising prices to capitalize on the increased demand. As a result, the overall price level in the economy begins to rise.

4. Wage and Cost Push: Demand-pull inflation can also be accompanied by wage and cost push factors. As prices rise, workers may demand higher wages to maintain their purchasing power. Additionally, the increased demand for inputs such as raw materials and labor can lead to higher production costs, which are then passed on to consumers in the form of higher prices.

5. Positive Feedback Loop: Demand-pull inflation can create a positive feedback loop. As prices rise, consumers may anticipate further price increases and increase their spending, further fueling the demand for goods and services. This cycle continues until the economy reaches a point where the supply of goods and services can no longer keep up with the demand, leading to a sustained increase in the overall price level.

In summary, demand-pull inflation occurs when there is an increase in aggregate demand that exceeds the economy's ability to supply goods and services. This leads to a rise in the overall price level as producers and sellers respond to excess demand by increasing prices.