Demand Pull Inflation:

It describes a sustained increase in the general price level that is caused by a permanent increase in nominal aggregate demand. Simply, is can be viewed as an inflation that occurs as a result of increase in aggregate demand.

In Figure, an increase in aggregate demand from AD₀ to AD₁ given the aggregate supply creates excess demand at P₀. This causes price levels to increase from P₀ to P₁. A new equilibrium is established at point E₁ with output at Y₁ and at a higher price level of P₁. The continuous repetition of this process will lead to a sustained increase in the price level, which characterizes demand-pull inflation.