Why does a rise in gdp cause inflation?

Question

Please explain simply and thoroughly

Answer 1

More money chasing less goods.

Answer 2

We tend to divide GDP up into two abstract groups: those willing to supply goods and labor, and those wanting to buy goods and labor. Sometimes, those wanting to buy goods spend more than what other people are wanting to supply, so the price rises. In this very simplistic model, it is the whole economy is treated like the market for oranges or apples.
This can only happen in the short run, because the extra spending has to come from savings.

But basically we say that increases in demand puts pressure on prices.

If you want to know what really causes inflation, that is another story. That is the result of too much money being printed or interest rates set too low by the fed. The reduction in interest causes an immediate increase in spending, as does the increase in money from the fed - a two pronged attack on price stability. Now, the increase in the price level is immediate and fast. But an interesting thing happens. Owners note that their prices have risen but their wages haven't kept up. So now they can hire more or produce more output. This artificial lowering of the wage increases output.

To sum up, although increases in GDP put pressure on prices, it is really the FED that causes real sustained inflation. In fact, the story usually goes - increase in money, increase in inflation and output, and not - increase in GDP leads to increase in inflation.

Answer 3

A rise in GDP means the living standards of people has or is improving. More products coming in due to an increase in the demand and this increase is due to an increment in what consumers are earning. This will then cause an inflation; a rise in the price level so that people can buy as much as to meet their needs only and government can earn their revenue.

Answer 4

When the economy is expanding firms want to expand output so they want more inputs, including labor and capital. This increases the demand for both so put upward pressure on wages and interests rates. If the central bank responds to the increase demand for capital and creates "money" at a rate that exceeds the growth rate of the economy to keep interest rates below the "market rate", inflation is the result. If they provide too little they hold down growth and wages.