Theories of Inflation:

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.

When  aggregate  demand  exceeds  aggregate  supply  at  current prices, prices  are pulled upwards to equilibrate aggregate supply and demand.

Figure: Demand Pull Inflation

In figure , an increase in aggregate demand from AD_o to AD₁ given the aggregate supply creates 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 with characterizes demand-pull inflation.