Question : Demand-pull inflation occurs when:
Option 1: Aggregate demand exceeds aggregate supply
Option 2: Aggregate supply exceeds aggregate demand
Option 3: Wages and input costs increase
Option 4: The government increases taxes
Correct Answer:
Aggregate demand exceeds aggregate supply
Solution : The correct answer is (a) Aggregate demand exceeds aggregate supply.
Demand-pull inflation happens when the total demand for goods and services in an economy surpasses the economy's ability to produce them. This excess demand puts upward pressure on prices as consumers compete for limited goods and services, leading to an increase in the general price level.
Factors that can contribute to demand-pull inflation include increased consumer spending, government expenditure, investment, or net exports. These factors can boost aggregate demand beyond the capacity of the economy to meet the increased demand through increased production.
Demand-pull inflation can also be influenced by other factors, such as monetary policy, fiscal policy, and external shocks. For example, an expansionary monetary policy that increases the money supply can stimulate spending and contribute to demand-pull inflation.
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