Question : Demand-pull inflation occurs when:
Option 1: Aggregate demand exceeds aggregate supply
Option 2: Aggregate supply exceeds aggregate demand
Option 3: There is a decrease in aggregate demand
Option 4: There is a decrease in the aggregate supply
Correct Answer:
Aggregate demand exceeds aggregate supply
Solution : The correct answer is (a) Aggregate demand exceeds aggregate supply
Demand-pull inflation is a type of inflation that occurs when the total demand for goods and services in an economy surpasses the economy's ability to produce and supply those goods and services. This imbalance between aggregate demand and aggregate supply puts upward pressure on prices.
When aggregate demand exceeds aggregate supply, it indicates that there is excess demand in the economy, leading to competition among buyers for limited goods and services. As a result, producers may increase their prices to capitalize on this high demand and limited supply. This leads to a general increase in the overall price level, causing demand-pull inflation.
